Bank PLR

PLR stands for Prime Lending Rate. It was the benchmark interest rate that commercial banks in India used to price their loans before 2010. The PLR represented the minimum rate at which a bank would lend to its most creditworthy customers. All other loans were priced as PLR plus or minus a spread based on credit risk and loan type.

What Was PLR?

The PLR was the rate a bank charged its best and most trusted borrowers, such as large corporations with excellent credit histories. Home loans, personal loans, and other retail credit products were priced relative to PLR. A home loan might be offered at PLR minus 0.5%, meaning if the PLR was 13%, the home loan rate would be 12.5%.

Banks set PLRs internally and could change them without direct RBI guidance, which led to problems with transparency and transmission of monetary policy changes.

Why Was PLR Replaced?

The PLR system had two major problems:

1. **Opacity** – banks could set different PLRs for different customers even for similar risk profiles, making comparison difficult
2. **Poor monetary transmission** – when the RBI reduced its policy rates, banks were slow to pass on these cuts to borrowers. Existing borrowers particularly suffered as banks were quicker to raise rates than to reduce them

To fix these issues, the RBI replaced PLR with the Base Rate system in July 2010, and later with MCLR (Marginal Cost of Funds-based Lending Rate) in April 2016.

PLR to MCLR: The Evolution

| Era | Rate System | Introduced |
|—–|————|————|
| Before 2010 | PLR | Historical |
| 2010-2016 | Base Rate | July 2010 |
| 2016 onward | MCLR | April 2016 |
| Emerging | EBLR/RLLR | October 2019 |

Why It Still Matters

Although PLR is no longer used for new loans, some older loans taken in the pre-2010 era may still be linked to PLR. Borrowers with such loans can request their bank to switch to MCLR or an external benchmark-linked rate for better transparency and faster rate transmission.

Practical Example

In 2008, Sunita took a home loan linked to the bank’s PLR at PLR minus 1%. The PLR at that time was 13%, so her effective rate was 12%. When RBI cut rates significantly in 2009, the bank reduced its PLR slowly and by a smaller margin than expected. Sunita did not get the full benefit of the rate cut. Under the current MCLR or EBLR system, rate transmission is faster and more transparent.

Key Takeaways

– PLR was the benchmark lending rate used by banks before 2010
– It applied to the most creditworthy borrowers; others paid PLR plus a spread
– PLR was replaced by Base Rate in 2010 and MCLR in 2016 due to poor transparency and slow rate transmission
– Some legacy loans may still be linked to PLR; borrowers can request a switch to MCLR
– Understanding PLR history helps in interpreting older loan documents and agreements