“Co-operative banks will now be free to determine their lending rates taking into account their cost of funds, transaction cost, etc. with the approval of their managing committee. This will help the co-operative banks in attracting good/prime borrowers,” RBI said in its credit policy announced on Monday.
The move is intended to provide greater flexibility to co-operative sector, RBI said. Because of MLR, the cooperative banks did not have the flexibility to apply different rates to borrowers, particularly those with high credit worth. Cooperative banks’ MLR was also seen to be higher than the interest rates charged by the commercial banks, earlier.
However, the RBI has asked these banks to ensure that the interest rates charged by co-operative banks are transparent and known to all their customers. Banks are, therefore, requested to publish the minimum and maximum interest rates charged by them, and display this information in every branch.
Reacting to the announcements, Model Co-operative Bank chairman John D’Silva said: “It is a good decision. It imparts flexibility to cooperative bank boards to decide the rates based on cost of funds and their financial strength. It has been long-overdue. The decision will keep the co-operatives in a good stead”.
State central co-operative banks were given freedom to determine their lending rates subject to the prescription of MLR of 12 per cent per annum by the Reserve Bank since October 18, 1994. Similarly, Urban Co-operative Banks (UCBs) were subject to the prescription of MLR at 13 per cent per annum effective June 21, 1995, which was reduced to 12 per cent effective March 2, 2002.
Since August 26, 1996, RRBs were given freedom to determine their lending rate. At present, commercial banks other than RRBs have the freedom in deciding their PLRs with the approval of their Boards. In the annual policy Statement of April 2001, PLR was made a reference/benchmark rate, so that commercial banks are free to lend at sub-PLR rates to creditworthy borrowers.