Bank of India has decided to reduce its prime lending rate by 50 basis points to 11 per cent with effect from December 1, 2003. The bank took this decision so as to align its PLR with that of peer public sector banks.

BoI's PLR at 11 per cent will still be a shade higher than that of State Bank of India (10.5 per cent) and Bank of Baroda (10.75 per cent).

The bank, in a press release said, "Pending emergence of the guidelines for a benchmark PLR, BoI has taken this step to work out its own PLR in accordance with the Reserve Bank of India's indicative guidelines."

IBA, at present, is working on creating the framework for a benchmark PLR for banks as per RBI directions.

The Central Bank of India also plans to pare its PLR by a similar quantum to 11 per cent. It's chairman and managing director had made an announcement to this effect on November 3, the day of the review of the monetary and credit policy.

BoI has simultaneously rationalised its interest rate structure to a cross section of borrowers, including small scale industries, agriculture, other priority sectors, export credit and non-priority sector borrowers also.

Agriculture and other priority sector advances upto Rs 50,000 will be charged at the sub-PLR of nine per cent and SSI advances over Rs 50,000 to Rs 200,000 will charged 10 per cent.

The rate of interest on advances to agriculture and other priority sectors -- over Rs 50,000 (Rs 200,000 in the case of SSIs) to Rs 10 lakh (Rs 1 million) -- will now be 11 per cent instead of 11.5 per cent.

It may be recalled that PSU bank chiefs had failed to reach a consensus over the formulation of a single benchmark prime lending rate at the IBAs managing committee meeting held on November 20th in New Delhi.

The IBA had proposed a cost-based single benchmark PLR, whereby each bank will publish a single PLR, which will take into account various cost components like operating costs, asset and liability costs, term premiums, interest rate risk, profit margin, capital charges etc.

It was proposed that loans outside the purview of PLR will be kept separate but instead of having multiple PLRs, there will be only one PLR.

However, under this norm, each bank will be free to decide on the spread above the PLR.

This was expected to reduce the anomaly in the loan market as once a PLR for a bank is defined, it cannot violently swerve when deciding on the rates to offer for loans.

Bankers are of the view that the issue should be once again re-examined as various loans such as those for home and retail are out of the PLR ambit and it is only the cut-throat competition in the home loans segment that have spurred calls for a single PLR.

Moreover, there are some clients who take sub-PLR rates. Therefore, a need was felt to look into the matter from a more practical perspective.