ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Inequity in Bank Lending at Below Prime Lending Rates

Market expectations are generating pressures on the central bank to raise the bank rate. However a close analysis indicates that there is little justification for a hike in interest rates. Public policies ought to lead market expectations rather than being driven by them. What is required, at the same time, is that pressure be brought to bear on banks to end the unhealthy practice of lending below the prime lending rate to large corporates. The RBI governor has observed that there is underpricing of risk in corporate lending and there could be overpricing in lending to small borrowers and agriculture. This inequity in lending is unhealthy for the development process; a policy directive is called for that directs banks to lend only to small borrowers at sub-PLR rates and keep the spread beyond PLR to within 3 to 4 percentage points.

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