Prime lending rate

From CopperWiki
Jump to: navigation, search

Prime lending rate (PLR) is the benchmark rate of interest at which banks lend to borrowers. When the central bank takes measures to control inflation or liquidity, many public and private sector banks react by raising their benchmark lending rate. This makes home, personal and vehicle loans costlier, dampening credit.

Why should I be aware of this?

Availability of funds in the banking system and demand for credit by consumers (both retail and industrial) determine what the PLR should be.

All about prime lending rate

The PLR is the rate which a bank charges its best customers. The rate is fixed by calculating — on a weighted basis — the bank’s average cost of funds and thereafter adding a small return. This is a transparent method as both the cost of the bank’s funds and its strategy for pricing risks could be gleamed from the PLR by even lay people.

The mechanism obviously called upon banks to evaluate more scientifically not only their assets but also their liabilities and in the process helped them to be more efficient.

For policy makers, PLRs signalled the actual movement of market interest rates. Banks were asked to formulate their own positions on interest rates.

References:

  • Interest rate and PLR
  • Timely move to review prime lending rates