Why Benchmark Prime Lending Rate (BPLR or benchmark PLR) did not work?
The PLR was introduces in 2003 to ensure that banks publish their lending rates based on their true cost of funds. All lending was expected to be at or above the BPLR. This was a fair expectation, as you can’t expect a bank to lend below its cost of funds! However, over time, competition forced banks to do exactly the opposite. Banks stopped adjusting the BPLR when the interest rates went down therefore, the BPLR lost its relevance as a rate reflecting the cost of funds for banks. And when the RBI allowed lending at below BPLR rates, the banks started giving out most of their loans below the PLR / BPLR (also known as sub-PLR or sub-BPLR loans). In fact, the loans were priced as BPLR minus 200 basis points! (That is, 2% less than the BPLR) For example, banks made home loans at 8% when the BPLR was 12%! Thus, the PLR / BPLR system became totally meaningless.
