In a bid to make lending rates favourable to borrowers, the Reserve Bank of India is likely to introduce benchmark prime lending rate based on various parameters like actual cost of funds, operating expenses and non-performing assets by October this year.
The executive directors of banks are slated to meet RBI bosses in Mumbai on Wednesday to work out the modalities of the benchmark PLR, senior bank officials said.
RBI will determine the amount of weightage that should be given to each of the parameters after discussion with banks.
Sources said, the RBI Governor will finalise it after a meeting with bank chiefs hopefully by next month.
"The benchmark PLR will be like the London Interbank Offer Rate (LIBOR). Each bank will have its own benchmark PLR depending on the various financial parameters. Ultimately it will benefit the borrowers," a public sector bank's executive director said, referring to the forthcoming meeting.
The move follows RBI Governor Bimal Jalan's April Credit Policy announcement of a benchmark PLR based on a bank's actual cost of funds, operating expenses, cost of capital, default premium (or NPA) and term premium and profit margin.
The benchmark PLR will be introduced in place of tenor-linked PLR, which RBI decided to discontinue.
RBI plans to review the system of determination of benchmark PLR by banks and actual prevailing spreads between lending and deposit rates in September.
The nation's central bank has floated the idea of benchmark PLR considering the rate cut war among banks irrespective of their financial health.
Sources said banks having a lower cost of funds will be able to offer a lower PLR compared to other banks.
"While there is little room for improving the cost of capital and default premium, banks can reduce their cost of borrowing," a banker said.
Operating cost, which is yet another parameter to adjudge the benchmark PLR, is expected to rise putting pressure on banks to raise the lending rates, the banker added.
Most of the banks are contemplating a reduction in deposit rates after the 0.50 per cent repo rate cut last week.
Moreover, RBI had on Monday reiterated that interest rates will continue to remain soft.
These factors will further bring down the cost of funds of banks.
The benchmark PLR will enable a borrower to get a more realistic rate of interest on its loans, the banker said.