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Wednesday, September 9, 2009
RBI gets tough on risk pricing
If you expect interest rates to drop further, it is time for a rethink. While banks in India seem to be very sanguine about pricing their assets appropriately, unfortunately their regulator does not think so. As per a business daily, the RBI has directed banks to stop lending sub-PLR (below the benchmark prime lending rate). About three quarters of the bank lending in FY09 were at sub-BPL rates while term deposits constituted around 80% of banks' total deposits. This means while the banks were borrowing funds at higher rates, they were compromising on the loan pricing so as to encourage credit offtake. By doing this, they were compromising on providing for risk. The RBI believes that sub-PLR lending does not bring in adequate transparency in risk pricing. However, bankers do not seem to agree.
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