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Lending rates unrealistic: Survey

July 07, 2004 12:18 IST

Warning that hardening global oil prices and capital inflows may affect monetary conditions this year, the Economic Survey on Wednesday said lending rates in India have remained "sticky" and not fallen in line with deposit rates.

The Survey for 2003-04, presented in Parliament, said the Benchmark Prime Lending Rate had not benefitted all borrowers, prompting Reserve Bank of India to advise banks to align the pricing of credit for improved fund flow to the industrial sector.

Economic Survey 2003-200: Complete Coverage

On the interest rates, which had been softening in recent years, the survey voiced concern over the "downward rigidity" in the lending rates, which have not fallen as much as the deposit rates.

Noting that the RBI had advised banks for aligning pricing of credit to risk, the Survey said, "Measures already taken and being taken by RBI are expected to further ease rigidities in lending rates, which will help to strengthen and sustain the current revival in the industrial sector."

Finding a wide gap between the lending and deposit rates, it said interest spread of the commercial banks had witnessed an increase during 2001-02 and the subsequent year.

Lamenting that lending rates had not benefitted small borrowers while large top-rated borrowers could get cheaper funds than the market rates (sub-PLR), it said RBI had put in place the benchmark PLR, which is 0.25-1.0 per cent lower than the PLR, but it only "somewhat addressed the problem."

Showing optimism on the prospects for this year, the Survey said capital inflows would continue in the medium term and it was imperative for the country to improve "absorptive capacity" for such inflows.

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