October 1994

Banks would determine their own lending rates for credit limits over Rs. 2 lakh. However, banks were required to declare their Prime lending rate (PLR) with the approval of their Boards taking into account their cost of funds, transaction cost, etc.

February 1997  

To enable a smooth transition to the loan system as opposed to cash credit system of credit delivery. PLRs for the cash credit and demand loan component might be declared separately.

October 1997

Banks allowed to announce, with the approval of the their Boards separate Prime Term Lending Rates (PTLR for term loans of 3 years and above.

April 1998

In order to remove the disincentive to the flow of credit to small borrowers below Rs.2 lakh, instead of prescribing a specific rate uniformily for all banks, PLR was converted  a ceiling rate on loans up to Rs.2 lakh. Banks were allowed to charge fixed/floating rate loan at or above PLR for credit limit of over Rs.2 lakh.

April 1999

The concept of Tenor linked Prime Lending Rates (TPLRs) was introduced to give the Scheduled Commercial Banks more operational flexibility.

October 1999

Banks were given the flexibility to charge interest rates without reference to the PLR in respect of certain categories of loans/credit like discounting of bills, lending to intermediary agencies, etc.

April 2000

Banks were given the freedom to offer loans on fixed or floating basis. However, for small loans up to Rs. 2 lakh, the stipulation of not exceeding PLR (of relevant maturity) continued.

April 2001

Keeping in view the international practice and to provide further operational flexibility to commercial banks in deciding their lending rates, it was decided to make PLR a benchmark rate. Accordingly, commercial banks were allowed to lend at sub-PLR rate for loans above Rs.2 lakh.

April 2002

The Reserve Bank had indicated the intention of collecting PLR as well as the maximum and minimum interest rates on advances charged by the banks and place the same in public domain for customers’ protection and meaningful competition. Accordingly, the bank-wise information on the same is disseminated in the RBI web site for each quarter starting from the quarter ended June 2002.

April 2003

In order to enhance transparency in banks’ pricing of their loan products, the Reserve Bank advised banks to announce a benchmark PLR with the approval of their Boards. Banks were advised to consider their (i) actual cost of funds, (ii) operating expenses and (iii) a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin, while arriving at the benchmark PLR to ensure that the PLR truly reflects the actual cost. Since all other lending rates can be determined with reference to the benchmark PLR arrived at, as above, by taking into account term premia and/or risk premia, the system of tenor-linked PLR was proposed to be discontinued.

November  2003

IBA Advisory on adoption of BPLR

Public  Sector Banks                                                                             Sample  2004Q1 - 2009Q1

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Repo Rate Change

Repo Rate Change in Previous Quarter

Repo Rate Change in two Quarters before

Increase in Repo Rate

…

0.89
(2.06)*

…

Decrease in Repo Rate

0.66
(2.96)*

…

…

DW statistic : 2.02             R bar squared : 0.47                     

Private Banks                                                                                        Sample  2004Q1 - 2009Q1

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Repo Rate Change

Repo Rate Change in Previous Quarter

Repo Rate Change in two Quarters before

Increase in Repo Rate

1.05
(2.05)*

…

1.94
(2.82)*  

Decrease in Repo Rate

…

…

…

DW statistic : 2.36                           R bar squared : 0.33     

5 Major Foreign Banks                                                                            Sample  2004Q1 - 2009Q

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Repo Rate Change

Repo Rate Change in Previous Quarter

Repo Rate Change in two Quarters before

Increase in Repo Rate

0.77
 (2.00)*

…

…

Decrease in Repo Rate

…

…

…

DW statistic : 1.69            R bar squared : 0.17

Note:  * denotes  t value at 5 per cent level of significance    ...  : Not significant at 5 per cent level

Public  Sector Banks                                                                               Sample  2004Q1 - 2009Q

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Reverse Repo Rate Change

Reverse Repo Rate Change in Previous Quarter

Reverse Repo Rate Change in two Quarters before

Increase in  Reverse Repo Rate

…

…

…

Decrease in Reverse Repo Rate

…

…

…

DW statistic : 2.07             R bar squared : 0.37                     

Private Banks                                                                                        Sample  2004Q1 - 2009Q1

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Reverse Repo Rate Change

Reverse Repo Rate Change in Previous Quarter

Reverse Repo Rate Change in two Quarters before

Increase in  Reverse Repo Rate

…

…

…  

Decrease in Reverse Repo Rate

…

…

…

DW statistic : 2.43                           R bar squared : 0.02 

5 Major Foreign Banks                                                                             Sample  2004Q1 - 2009Q

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Reverse Repo Rate Change

Reverse Repo Rate Change in Previous Quarter

Reverse Repo Rate Change in two Quarters before

Increase in  Reverse Repo Rate

…

…

…

Decrease in Reverse Repo Rate

…

…

…

DW statistic : 1.69          R bar squared : 0.17

Note:  * denotes  t value at 5 per cent level of significance    ...  : Not significant at 5 per cent level

Public  Sector Banks                                                                             Sample  2004Q1 - 2009Q1

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Weighted Average Call Money  Change

Weighted Average Call Market  Change
in Previous Quarter

Weighted Average Call Market  Change
in two Quarters before

Increase in Weighted Average  Call Money Rate

0.38
(2.92)*

…

…

Decrease in Weighted Average  Call Money Rate

…

…

0.27
(2.10)*

DW statistic :  1.73             R bar squared :  0.37                 

Private Banks                                                                                        Sample  2004Q1 - 2009Q1

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Weighted Average Call Money  Change

Weighted Average Call Market  Change
in Previous Quarter

Weighted Average Call Market  Change
in two Quarters before

Increase in Weighted Average  Call Money Rate

0.32
(2.74)

…

…  

Decrease in Weighted Average  Call Money Rate

-0.30
(-2.52)

0.40
(3.42)

…

DW statistic : 2.16                       R bar squared : 0. 54

5 Major Foreign Banks                                                                            Sample  2004Q1 - 2009Q

Dependant Variable : Change in Modal BPLR

Explanatory Variables

Contemporaneous Weighted Average Call Money  Change

Weighted Average Call Market  Change
in Previous Quarter

Weighted Average Call Market  Change
in two Quarters before

Increase in Weighted Average  Call Money Rate

0.33
(3.52)

…

…

Decrease in Weighted Average  Call Money Rate

…

…

…

DW statistic : 1.99            R bar squared : 0.37

Note:  * denotes  t value at 5 per cent level of significance    ...  : Not significant at 5 per cent level

Annex 3: Outstanding Sub-BPLR lending of SCBs

(Percentage of share in total loans excluding small loans and export credit)

 Credit Type

Mar-02

Jun-02

Mar-03

Dec-03

Sep-04

Dec-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

i)  Cash Credit

5.4

5.3

6.5

6.6

9.5

6.2

7.7

10.3

11.7

12.6

13.2

14.0

12.5

13.3

14.0

13.9

12.9

12.4

12.4

ii)  Consumer Credit

0.6

1.5

3.3

8.1

7.7

6.5

8.7

10.7

8.1

10.3

10.7

9.0

8.9

10.5

8.9

8.1

8.7

7.5

3.7

iii) Demand Loan
(including bill
discounting)

5.9

8.6

6.9

7.3

7.6

5.8

8.2

7.8

7.4

5.7

6.4

6.5

6.4

8.3

8.5

11.4

8.2

6.0

6.9

 iv) Term Loans

16.5

22.7

21.0

26.7

31.3

46.5

34.4

38.0

41.9

46.7

46.6

46.3

50.1

44.2

44.3

44.2

46.9

46.1

43.9

a) 1-180 days

2.8

7.3

3.0

2.3

1.7

2.0

2.6

2.3

3.4

2.8

2.9

3.3

3.1

4.6

5.7

4.2

3.6

3.0

3.1

b) 180 days-1 year

1.0

2.9

1.0

1.3

1.8

1.5

2.1

1.6

1.9

2.0

1.9

1.7

1.7

2.0

2.3

2.1

1.9

2.0

2.2

c)1-3 years

1.6

2.9

1.9

3.0

3.4

2.7

4.6

4.5

5.6

5.8

5.2

5.3

5.3

6.3

6.1

7.7

6.3

5.8

5.3

d) 3-5 years

1.4

2.4

4.8

10.4

10.9

10.1

11.2

14.5

14.0

18.2

17.7

17.2

20.1

9.8

11.7

10.0

17.9

15.7

15.7

e)above 5 years

6.4

3.4

6.6

5.3

8.9

27.1

10.2

11.2

12.6

13.6

14.7

14.9

12.7

17.1

13.7

15.4

13.3

13.3

13.7

f) Others

3.5

3.9

3.8

4.4

4.7

3.2

3.7

3.9

4.5

4.3

4.3

3.9

7.3

4.5

5.0

4.8

3.9

6.3

4.0

Total (i to iv) as
percenatage of
all loans

28.4

38.0

37.7

48.7

56.1

65.1

58.9

66.8

69.2

75.3

76.9

75.8

77.9

76.3

75.8

77.6

76.7

72.0

66.9

Credit Type

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

i)  Cash Credit

14.3

15.6

13.4

15.4

15.5

14.3

12.9

12.6

12.2

ii)  Consumer Credit

1.3

1.1

1.0

1.7

1.0

2.7

2.5

2.2

2.2

iii) Demand Loan
(including bill discounting)

5.9

6.3

5.9

8.0

8.0

12.6

7.7

5.2

6.3

 iv) Term Loans

51.7

50.2

54.8

47.5

46.7

44.3

50.0

48.7

43.6

a) 1-180 days

1.9

2.5

2.0

3.3

5.3

3.1

2.8

2.3

2.6

b) 180 days-1 year

1.4

1.4

1.3

1.8

1.7

1.9

1.4

1.6

1.9

c)1-3 years

5.0

4.8

4.8

6.5

5.7

7.8

5.8

5.1

4.8

d) 3-5 years

22.4

21.3

24.9

11.3

13.3

10.1

22.2

18.4

17.3

e)above 5 years

16.0

15.5

12.7

19.0

14.7

16.1

13.2

13.6

12.6

f) Others

5.0

4.7

9.0

5.5

6.0

5.3

4.6

7.7

4.4

Total (i to iv) as
percenatage of
all loans

73.2

73.2

75.0

72.6

71.2

73.8

73.1

68.7

64.2

 Credit Type

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

i)  Cash Credit

11.7

11.0

11.1

10.2

11.8

13.3

13.9

13.3

16.0

ii)  Consumer Credit

38.3

32.3

33.5

32.3

28.1

25.3

23.3

23.3

5.1

iii) Demand Loan (including bill discounting)

7.3

6.0

5.9

6.4

8.6

7.4

7.2

6.9

6.5

 iv) Term Loans

33.9

38.7

37.6

37.5

40.1

42.9

45.1

44.5

55.8

a) 1-180 days

4.2

3.6

4.4

5.3

4.6

6.5

5.5

4.7

4.2

b) 180 days-1 year

2.4

2.1

2.2

2.0

3.1

2.2

2.5

2.5

3.7

c)1-3 years

5.0

6.4

6.1

5.8

7.2

7.0

8.0

8.3

8.1

d) 3-5 years

7.1

8.6

8.0

7.5

9.5

10.4

9.6

9.9

11.2

e)above 5 years

13.0

16.0

14.8

15.1

13.3

14.1

17.1

16.2

25.7

f) Others

2.2

2.0

2.2

1.9

2.4

2.8

2.4

2.8

2.9

Total (i to iv) as
percenatage of
all loans

91.2

88.0

88.2

86.4

88.7

89.0

89.5

87.9

83.5

 Credit Type

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

i)  Cash Credit

7.1

7.0

7.8

5.2

7.6

9.3

10.3

6.7

6.8

ii)  Consumer Credit

21.0

17.9

22.4

21.0

21.7

7.2

23.1

21.2

24.3

iii) Demand Loan (including bill discounting)

9.0

9.9

13.3

15.9

12.6

14.4

15.8

13.2

16.0

 iv) Term Loans

33.5

31.4

35.1

35.8

35.8

50.2

21.2

20.4

20.5

a) 1-180 days

8.1

9.7

10.6

13.5

13.0

12.6

5.6

6.4

7.3

b) 180 days-1 year

5.5

3.7

3.6

3.3

4.5

4.7

4.4

5.3

3.5

c)1-3 years

7.5

6.8

7.9

5.7

6.3

10.3

6.2

5.7

6.2

d) 3-5 years

3.0

3.1

3.5

3.5

3.5

3.8

1.8

1.6

1.7

e)above 5 years

6.6

5.9

6.4

6.2

5.4

9.1

1.3

1.0

1.1

f) Others

2.7

2.3

3.2

3.7

3.2

9.8

2.0

0.4

0.7

Total (i to iv) as
percenatage of
all loans

70.6

66.3

78.5

77.9

77.6

81.2

70.5

61.5

67.5

(per cent)

Year

PSBs

Private Sector Banks

Five Major Foreign Banks

Modal
BPLR

Max Spread

Min Spread

Modal
BPLR

Max Spread

Min Spread

Modal
BPLR

Max
Spread

Min
Spread

Mar 04

11.00

5.00

-5.25

12.00

9.50

-9.00

12.75

9.25

-9.40

Jun 04

11.00

5.00

-6.20

12.00

10.25

-8..00

12.75

10.00

-7.8

Sep 04

11.00

5.00

-6.00

12.00

10.25

-8.00

12.75

10.00

-9.65

Dec 04

11.00

8.50

-7.00

12.00

11.00

-8.50

12.75

10.00

-8.05

Mar 05

11.00

4.50

-7.00

11.50

8.50

-8.50

12.75

10.00

-8.52

Jun 05

11.00

5.00

-7.00

11.50

11.44

-8.00

12.75

12.00

-7.74

Sep 05

11.00

4.50

-7.00

12.00

8.50

-8.00

12.75

12.00

-9.89

Dec 05

11.00

5.00

-7.00

12.00

7.00

-8.00

12.75

11.00

-9.89

Mar 06

11.00

5.00

-7.00

12.00

7.00

-8.00

12.75

13.25

-7.74

Jun 06

11.25

4.50

-7.50

12.50

13.50

-8.50

12.75

12.00

-7.74

Sep 06

11.50

4.50

-7.50

13.00

11.50

-8.50

12.75

10.00

-7.74

Dec 06

11.50

4.50

-7.50

13.00

11.00

-8.50

12.75

10.75

-7.74

Mar 07

12.50

4.50

-8.50

14.00

11.00

-10.50

13.50

12.75

-8.93

Jun 07

13.25

4.50

-9.25

15.00

11.00

-10.43

14.50

12.50

-8.6

Sep 07

13.25

4.50

-9.25

14.00

9.50

-11.00

14.50

12.50

-8.5

Dec 07

13.25

4.50

-9.25

15.00

7.00

-11.00

14.50

11.50

-8.5

Mar 08

13.25

5.00

-9.25

15.00

7.00

-11.00

14.25

12.50

-8.2

Jun 08

13.00

5.00

-9.25

15.25

9.75

-10.94

14.50

5.5

-8.79

Sep 08

14.00

4.50

-7.50

16.00

7.00

-11.94

15.50

4.25

-9.79

Dec 08

13.25

4.50

-6.50

15.75

13.00

-11.44

15.50

4.75

-9.29

Mar 09

12.50

4.50

-6.85

16.75

10.00

-11.44

15.25

4.75

-9.29

Representatives from Industry Associations

Shri Ajit Ranade

Chief Economist,
Confederation of Indian Industry

Shri V.Kumaraswamy

CFO, JK Papers Ltd,
Federation of Indian Chamber of Commerce & Industry

Shri. M.V. S. Seshagiri Rao

Dir(Fin), Jindal Vijaynagar Steel Ltd
Associated Chamber of Commerce & Industry of India

Shri Thakkar

Co Chairman of Committee on Finance & Banking, Indian Merchant Chamber

Dr Dhananjay Samant

O-in-C, Banking & Finance  Committee,
Indian Merchant Chamber

Shri Sharad Kumar Saraf

VP & Chairman (WR),
Federation of Indian Export Organisation

Shri Anand Ladsarya

Managing Committee  Member,
Federation of Indian Export Organisation

Shri Ramesh Iyer

Chairman of Bkg. & Fin. Committee,
Bombay Chamber of Commerce & Industry

Dr Atindra Sen

Dir.Gen.,
Bombay Chamber of Commerce & Industry

Dr Shubhada M  Rao

Chairman of Economic Policy & Corporate Strategy,
Bombay Chamber of Commerce & Industry

Shri S.J.Balesh

Co-Chairman, Bkg.&Fin. Committee,
Bombay Chamber of Commerce & Industry

Shri Ravi

Chief Fin.Officer, M&M Fin.Services, Bombay Chamber of Commerce & Industry

Shri K. Chandra Sekar

Sr. VP. Corp Fin,
Bombay Chamber of Commerce & Industry

Shri Chandrakant Salunkhe

President, Small & Medium Business Development Chamber of India

Shri S.K.Sarkar

Member, Federation of Indian Micro and Small & Medium Enterprises

Shri S. S. Rathi

National President, Federation of Association of Small Industries of India

Shri Avinash Dalal

Ex Comm, Federation of Association of Small  Industries of India

Shri Purushottam

Thane Small Scale Industries Association

People who Contributed Suggestions to the Working Group

Abhishank Jajur

abhishank.jajur@gmail.com

Ajay Garg

M/S Ajay Garg and Associates, Faridabad

Anupam Shah

President, Merchant Chambers of Commerce, Kolkatta

Anand

anand186@rediff.com

Ashok K

ashokk018@yahoo.com

Ajit Rathore

ajit.rathore@gmail.com

Chanderpur Works Pvt. Ltd

Gopalan T  R

Tata Consultancy Services

Gupta

Gupta31641@rediffmail.com

Hirnesh B Havsar

hirnesh@rediffmail.com

Indian Bank

ibhocredit@dataone.in

K G K Subba Rao

K. Kanagasabapathy

EPW Research Foundation, Mumbai

Mahendra Dohare

Mahendra_dohare@yahoo.co.in

P Balagopala Kurup

General Manager, Indian Overseas Bank, Central Office, Chennai

P C John

Integrated Risk Management Department, Federal Bank, Alwaye

P D Sharma

President,  Apex  Chamber of Commerce and Industry (Punjab)

P S Nagarsheth

President, Iron Steel Scrap & Shipbreakers Association of India

Punit Srivastava

Senior Vice President, Banking & Finance, Daiwa SMBC Securities

R. K. Gupta

Faridabad

S H Prashad

S Ramesh Kumar

Senior Vice President, Asit C Mehta Investment Intermediates Ltd.

Dr. T V Gopalakrishnan,

Bangalore

V Harikrishnan

vharikrishnan@yahoo.com

Annex 10:  PLR - International Experience

United States

Japan

Russia

1

2

3

4

1. % of bank lending linked to PLR

Between 10% and 25%

It is mostly for housing loans and small companies & not for small corporates

Between 10% and 25%

2. Presence of  sub-PLR lending

significant lending below the US Prime Rate

Sub-BLPR lending exist

Hardly any sub-PLR lending

3. Determination of PLR

Prime Rate generally set  at Fed Target plus 300bp

Cost plus

Cost plus

4. Frequency in review of PLR

As FOMC changes their Fed Target rate
(approx 8 times a year)

LT rate is set monthly. ST rates are reviewed as needed

No

5. The range and dispersion of PLR amongst various players (lenders / banks)

Banks have almost the same PLR

Dispersion in a narrow range
2

Dispersion over a moderate range
3

6. Elasticity of PLR in relation to deposit costs in your country

Elasticity is very high
1

Elasticity is high
2

Moderate
3

7. Correlation of PLR to the observable interest rate market benchmarks

Low correlation
4

High correlations
2

Low Correlation
4

8. Correlation of PLR to the Central Bank’s policy rates

Very high correlation
1

High Correlation
2

Moderate Correlation
3

9. Do multiple Prime lending rates  exist

No

No

No

10. Is there different PLRs for wholesale borrowers

No

No

11. Tenor-wise term structure of PLR

Yes
Short-term and long term

Yes

12.Is the PLR computation done bottoms-up

Fixed spread over the fed target rate
 (at 300bps)

Yes

No

Source : Survey by Citibank, India

Note: On a Scale of 1 to 5 - 1 implies dispersion in a tight range and 5 implies dispersion in a wide range for question 5. For Questions 6, 7, 8 on a scale of 1 to 5, 1 implies very high correlation and 5 implies very low correlation.

Annex 10: PLR – International Experiences (continued)

Brazil

Hong Kong

Malaysia

Poland

1

5

6

7

8

1. % of bank lending linked to PLR

CDI is the interbank overnight rate

Between 10% and 25%

Between 50% and 75%

Between 10% and 25%

2. Presence of  sub-PLR lending

Hardly any sub-PLR lending

Sub-PLR lending exists

Sub-PLR lending exist

Sub-PLR lending exist

3. Determination of PLR

CDI is always very close to SELIC rate, Central bank monitors CDI to avoid discrepancy between the two

Cost plus and also determined by competitive forces

PLR can be changed, however reasons for it have to be given to central bank

WIBOR determined by competitive forces. Spread takes into account  mainly cost of funding, type and tenor of the loan

4. Frequency in review of PLR

No

No

No

No

5. The range and dispersion of PLR amongst various players (lenders / banks)

Dispersion is in a very tight range
1

Dispersion is in a very tight range
1

Dispersion in a tight range
2

Dispersion in a tight range
2

6. Elasticity of PLR in relation to deposit costs in your country

Very high correlation
1

High Correlation
2

Very highly correlated with corporate short-term deposit.
Low correlation with retail deposit

High Correlation
2

7. Correlation of PLR to the observable interest rate market benchmarks

Very high correlation
1

Very low correlation
5

Very low correlation
5

Moderate Correlation
3

8. Correlation of PLR to the Central Bank’s policy rates

Very high correlation
1

High correlation

Very high correlation
1

Moderate Correlation
3

9. Do multiple Prime lending rates  exist

Yes

No

No

Yes

10.Is there different PLRs for wholesale borrowers

No

No

No

Yes

11. Tenor-wise term structure of PLR

No

Yes

No

Yes

12. Is the PLR computation done bottoms-up

No. CDI is the average rate of all overnight interbank loans

Based on funding cost, credit cost, operating cost and competition

No

Total PLR rate includes funding costs, credit costs, operational costs

Source : Survey by Citibank, India

Annex 10: PLR – International Experiences (continued)

Singapore

Taiwan

South Africa

1

9

10

11

1. % of bank lending linked to PLR

Between 10%  and 25%

Between 50% and 75%

Lending to individuals linked to PLR. Lending to corporate sector linked to floating rates (JIBAR) or PLR

2. Presence of  sub-PLR lending

Sub-PLR lending exist

Sub-PLR lending does not exist

Banks lend at a fixed spread to PLR based on customer’s credit quality

3. Determination of PLR

Cost plus as well as competitive forces

Cost plus

Industry body administers PLR, after extensive negotiations with Central Banks

4. Frequency in review of PLR

No

No

No. Linked to repo rate set by SA Reserve Bank

5. The range and dispersion of PLR amongst various players (lenders / banks)

Dispersion in a tight range
2

Dispersion in a wide range
4

Dispersion in a very tight range
1
It is same for all the banks

6. Elasticity of PLR in relation to deposit costs in your country

Low Correlation
4

Tight Correlation
2

Tight Correlation
2
Repo rate determined PLR. Deposit rates are heavily influence by repo rate , though liquidity condition also see deposit rate change

7. Correlation of PLR to the observable interest rate market benchmarks

Very Low Correlation
5

Low Correlation
4

Very Low Correlation
5

8. Correlation of PLR to the Central Bank’s policy rates

Very low Correlation
5

Low Correlation
4

Very tight correlation
1

9. Do multiple Prime lending rates  exist

No. Other BM like SIBOR, SOR exist for pricing loans etc.

No

No

10. Is there different PLRs for wholesale borrowers

No

Yes

No

11. Tenor-wise term structure of PLR

No

No

No
PLR is an overnight rate

12. Is the PLR computation done bottoms-up

Main components are reserve cost and credit cost

Main components are deposit rate and operation cost

No
It’s a fixed spread to the Central Bank policy rate

Source : Survey by Citibank, India

Annex 11 : Base Rate : An illustration

      Components

a.

One year Term Deposit rate

6.50%

b.

Less: CASA Adjustment (Factor 1 +Factor 2)

1.31%

c.

Negative Carry on CRR and SLR

0.96%

d.

Unallocated  Overhead  Cost

0.99%

e.

Average Return on Net worth

1.41%

Base Rate  ( a-b+c+d+e)

8.55%

Computation of the Base Rate : An illustration

1

Assumptions

Total Deposits

100

Rs. Crore

Savings Bank Deposits (SB)

22

Rs. Crore

Current Account Balances (CA)

10

Rs. Crore

2

Positive Carry on CASA

Savings Bank rate (SB rate)

3.50%

Difference (TD rate- SB rate)

3.00%

Proportion of Savings Bank Deposits (SBSHARE)

22.00%

Factor 1 ( SBSHARE * Difference in TD and SB Rate)

0.66%

Proportion of Current Account (CASHARE)

10.00%

Factor 2 ( CASHARE* TD rate)

0.65%

3

Negative Carry on CRR and SLR

Interest Cost on Deposits (1 year Deposit Rate)

6.50%

Assuming that Total Deposits

100

Rs. Crore

Returns required from Deposits

6.50

Rs. Crore

CRR  (as per cent of total deposits)

5.00%

CRR Balances

5

Rs. Crore

SLR  (as per cent of total deposits)

24.00%

SLR Balances

24

Rs. Crore

Deployable Deposits

71

Rs. Crore

Deployable Deposits (as per cent of total deposits)

71.00%

364 Treasury Bill Yield

5.00%

Return on SLR Balances

1.20%

Interest Cost on Deposits( 1 year Deposit Rate) adjusted for SLR return

5.30%

Returns required from Deployable Deposits to account for deposit interest cost

7.46%

Negative Carry Charge on CRR and SLR

0.96%

4

Unallocated Overhead Cost

Fixed Overheads comprise of HO and CO costs which cannot be allocated

Total Unallocatable Cost

1

Rs. Crore

Assuming the total deposits ( including CDs) are

100

Rs. Crore

Deposits Available for Deployment

71

Rs. Crore

Unallocated Fixed Overheads as a percentage of deployed funds

0.99%

5

Average Return on Net Worth

Net Profit

1

Rs. Crore

Capital

0.5

Rs. Crore

Reserves (excluding Revaluation Reserves)

10

Rs. Crore

Net worth (Infused Capital or Equity)+ Reserves

10.5

Rs. Crore

Deposits Available for Deployment

71

Rs. Crore

Average Return on Equity

0.10

Average Return on Net Worth = Return on Equity * Net Worth/Deployable Deposits

1.41%