The overhaul of the existing lending rate practice is the need of the hour and the system would adjust to the new regime over a period of time.

Economic prosperity is linked to the level of interest rates and availability of resources for productive uses. Till the late 1980s, we have seen highly administered interest regime in India, on both the liability and asset side. With the introduction of financial sector reforms in the early 1990s, most of the interest rates on the lending side were freed. With a view to encourage competitive loan pricing, RBI freed lending rates of scheduled commercial banks for credit limits of over Rs 2 lakh along with the introduction of the Prime Lending Rate (PLR) system in 1994. Subsequently, we moved into a regime of Benchmark Prime Lending Rate (BPLR) in 2003 and it was expected to reflect the actual cost of the banks. But as competition intensified, many of the loan products were getting priced below base rate and the concept of BPLR as a transparent benchmark reference rate lost its relevance. Cross-subsidization was considered as the main cause for this type of situation. It was observed that corporates were getting loans at very cheap rate at the cost of, probably, all other segments of the society who do not have the necessary bargaining power.

It was against this background, Reserve Bank of India (RBI) had set up a Working Group (WG) headed by its Executive Director Deepak Mohanty in the month of June 2009 to review the current system of loan pricing by the banks—popularly known as Benchmark Prime Lending Rate (BPLR) to improve transmission of monetary signals to interest rates in the economy.

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