The fears raised by RBI in its latest Report on Trends and Progress of Banking in India 2006-07 should not be brushed aside. The central bank has drawn attention to medium-term risks faced by the banking sector on account of the high growth in credit offtake in recent years and the growing uncertainty in financial markets. Stretching operations beyond reasonable limits, it has warned, will create serious asset-liability mismatches that may be difficult to handle in the event of a serious slowdown in growth. This is especially so since the reduced credit offtake in recent months has started exerting pressure on margins, forcing banks to look for new ways to prop up earnings. It is clear that commercial banks have sought to gain marketshare in the face of growing competition by resorting to less-than-transparent practices of lending larger and larger amounts at below their declared benchmark prime lending rates (BPLRs). As pointed out in the report, banks have continued to fix their BPLRs in an arbitrary manner?even as the range of rates hardened by 100-250 points. Consequently, the share of loans of sizes over Rs 2 lakh lent below BPLR by the country?s commercial banks has gone up by 10 percentage points to 79% of all outstanding loans over the year ending March 2007.
The central bank?s guidelines on lending rates are largely in tune with international practices. They grant reasonable flexibility. While the BPLR is set as a transparent ceiling rate for small loans up to Rs 2 lakh, banks have the requisite freedom to offer lower rates to creditworthy borrowers on the basis of well laid out norms approved by their boards. But the regulator perhaps did not expect such a large proportion of loans to be lent at sub-BPLR levels. Little did it think that such cheap lending arrangements would account for almost four-fifths of the large-sized loans sanctioned. Such practices typically mean that small borrowers must bear the burden of higher rates to subsidise the cheaper deals offered to large borrowers. This goes against all principles of equity in commercial practices, and is detrimental to the much-vaunted objective of inclusive banking. Yet, commercial banks are not wholly to blame. Given competitive pressures, the regulator could have foreseen such a problem, and done more than just urge bankers to be fair.
