Loans at a discount to the benchmark prime lending rates of banks are back with a majority of the fresh loans being disbursed at sub-PLR rates.
For some banks, 65 to 70 per cent of the fresh loan flows are at sub-BPLR rates, against 76 per cent in 2007-08.
Following the credit crunch, banks, including the public sector players, had stopped offering sub-BPLR loans owing to the heightened default risk. With liquidity more easily available, discounts are back in vogue.
Loans for commercial real estate are still not available, but loans to large manufacturing companies, in addition to most home loans and short-term farm loans, are being offered at single-digit rates.
Public sector bankers made this clear at Friday's meeting with Cabinet Secretary K M Chandrasekhar. Though BPLR for the majority of them was in the 12 to 12.25 per cent range, most loans were being offered at lower rates.
"BPLR has little relevance since we are offering short-term credit, which is backed by adequate securities, at 7.5 to 8 per cent," said a banker.
Another bank chief said, with comfortable liquidity and low demand for funds, there was little choice but to lend at a discount to the BPLR to ensure adequate credit growth.
"The pricing has to be right. If you give loans at cheap rates, you face the prospects of default. At the same time, if interest rates are high, borrowers will get a loan from a different bank and we will lose business. We have no option but to offer sub-PLR loans," said a public sector bank chairman.
While the average cost of funds for these banks was roughly 7 per cent, the average yield on their loan book was 10 to 10.5 per cent before the latest round of lending rate reductions, which saw most public sector banks, barring State Bank of India, lower the benchmark rates 25 to 50 basis points.
With the cost of funds at around 7 per cent, the minimum rate that they can charge for loans, after factoring in the operational costs, would be around 9 per cent, said a banker.
"We need to build in the default risk and other social obligations that are thrust upon us so the average yield would be higher," said a banker.
"Public sector banks can lower BPLRs further but the discount will also come down by the same magnitude," a source present at the meeting said.
