A COMMITTEE formed by the Reserve Bank of India is considering three separate benchmark

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prime lending rates for banks to bring about greater transparency in the pricing of loans.

Of the three benchmarks, one will be for large loans, another for small/medium scale enterprises and the third for retail customers.

The benchmark is a standard rate around which a bank’s prime customers are given loans. However, the benchmark has lost relevance over the years, with more than 80 per cent of bank lending happening at rates below it.

The committee is chaired by Deepak Mohanty, executive director of RBI, and has representation of the Indian Banks’ Association (IBA); the Banking Codes and Standards Board of India; public, private and foreign banks; and external experts.

ICICI Bank already has two benchmark prime lending rates -- one for its corporate customers and the other a floating reference rate for retail customers, to which products like the home loans are linked.

An IBA official said changes in the formula for calculating the benchmark were also on the cards. “It will be a compact formula that will take into account all revenue streams of a bank and its cost of funds,” he said. The formula that banks now use does not reflect the actual costs; nor does it recognise all income streams. The formula was brought in by IBA in 2005.

Earlier, banks had different benchmark rates for different products, such as term loans and working capital loans. Later, they shifted to a single benchmark on RBI’s insistence.

RBI set up the committee on June 12, giving it two months to submit its recommendation. It was later given an extension.

The terms of reference of the committee are: review the concept of a benchmark rate and the way it is arrived at, examine the extent of lending at below the benchmark and the wide divergence from it at major banks, suggest an appropriate loan pricing system based on best international practices, review the administered lending rates for loans up to Rs 2 lakh and for exporters, suggest a suitable benchmark for floating rate loans in the retail segment, and consider any other issue relating to lending rates.