Confused policy on interest rates

The Reserve Bank of India (RBI) is preparing to ban lending below the prime lending rate (PLR), the benchmark for all floating-rate.

Lending for export, home ,agriculture,vehicle,education are not related to PLR and credit facilities under these sector are extended by all banks at sub PLR rates in unison with government policies announced in this regard from time to time. It is astonishing that Government is now advocating complete stop on sub PLR loans. Till today banks were forced to extend credit facility to farmers, students, and exporters and to compensate bankers government used to give interest subsidy to banks. Now RBI desires to ban sub PLR lending and stop subsidy too . It means the entire loan will come on the shoulder of common men and there will be undoubtedly no change in profitability of rich and affluent class.

When government has given freedom to banks to decide its rate structure, it has got no right to ask or advice or change in rate structure. It is rather fun that inspite of risk reward ratio being adverse for most of the bankers, CMDs of most of PSU banks prefer loss to displeasure of FM and Government of India and this is why they have not only given respect to advices of the government but also taken its own initiative to extend more and more sub PLR loans to corporate sector.

It is also true that due to sharp reduction in CRR,SLR and repo rates banks are flush with enhanced liquidity and hence they are in such an awkward position that they also find it comfortable and profitable to extend credit to valuable and reliable corporate at Sub PLR rates than to make finance to small and mid-size borrowers with lesser reliability and poorer creditworthiness .It is to be kept in mind that even if banks do not like sub PLR financing they will have to opt for parking their surplus fund at RBI at rate as low as 3.5%.

Since total credit under sub PLR rates has been mounting gradually it will be very difficult now for bankers to prohibit sub PLR loans completely in short period.
Not only this, if bankers decide to stop the same immediately I think they will be left with no alternative else than stopping accepting fresh deposits from public till they are able to use profitably the exiting surplus fund.

To add fuel to fire, government will be forced to change its policy on agricultural and export loans which forces banks to lend under this sector at sub PLR rates. Banks will have to stop sub PLR lending under retail segment and there is no doubt that it will have repercussion on the entire demand value in auto sector and related ancillary sector. Obviously steps taken at this stage by the government are not only against its own policy but also suicidal attempt at a critical juncture when the entire economy is victim of global slowdown.

Too much hype had been created by government to reduce interest rates and banks were under continuous pressure from RBI to bring down interest rates to create demand and now the perfectly opposite step suggested by the same government to stop sub PLR lending is confusing also.

It is therefore desirable that government decides structure of the rate of interest on deposit and advances and it should be made uniformly applicable in all private and public sector banks. And this will be better than confusing statements issued from RBI on rate structure from time to time . Freedom given to banks on interest rate structure is unwarranted and should be taken back. Quality of service and other non interest income will be the area where banks will compete among them.There is no doubt thatinterest rates were better regulated before 1991 and in all parameters banks were performing better then compared to inflated profits shown by them under the current regime of freedom.