Banks play a catalyst role in economic development by providing adequate credit to the needy sectors on an ongoing basis.
Besides availability of credit, its affordability (Interest Rate) also plays a decisive
role in determining the credit flow in the country. Interest rates veering too
high or dipping too low may spell trouble to the credit quality and ultimately be
a cause of concern for financial stability of the banks as well as for development
of the country. Further, the lending rates of banks are expected to conform to
the changes in the Monetary Policy of RBI from time to time.
The evolution of Interest Rates on loans and advances in India can
broadly be classified into two phases viz. Regulated and Deregulated regimes.
Till the late 1980s, the interest rate structure on loans and advances
extended by commercial banks was largely administered by the RBI
and banks did not have any freedom to fix the interest on loan products,
irrespective of the nature of advance and the amount lent. Banks were simply
advised to follow the interest rate prescription of RBI, primarily to
ensure the flow of adequate credit to the desired productive sectors of
the economy.
RBI has initiated a number of steps to simplify and rationalize the
complex interest rate structure as well as to bring in transparency in the loan
pricing system. The important changes in lending rates post reform era. |
