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Mumbai, May 18: The Reserve Bank of India (RBI) has said that banks should align the pricing of bank credit to corporates to the assessment of credit risk to improve credit delivery and credit culture.
“Banks may take steps for putting in place comprehensive and rigorous risk assessment of borrowers using the database available with them, as also other internal and external factors so that the pricing of credit is related to risk more appropriately,” RBI said in its annual policy statement for 2004-05.
After the RBI’s mid-term review of the economy in November 2003, the Indian Banks’ Association had advised banks to announce a benchmark prime lending rate (BPLR) taking into account actual cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin, with the approval of their boards keeping in view the operational requirements.
Banks, however, have the freedom to price their loan products below or above their BPLR and offer floating rate products by using market benchmarks in a transparent manner.
Almost all commercial banks have adopted the new system of BPLR and the rates are lower in the range of 25-200 basis points from their earlier PLRs.
“While there is intense competition among banks to lend to large top-rated borrowers, other borrowers with long-standing relationship with banks and good credit record do not get the benefit of lower rates. As such, risk profiling of borrowers is also required for allocation of capital under Basel II apart from being desirable from the point of view of risk management and efficient use of capital,” the RBI observed.
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