Reserve Bank of India has asked banks to sharpen their risk assessment techniques, particularly for retail lending, so as to guard against any adverse impact on credit quality and directed them to address the issue of rigidity in downward movement of lending rates.

RBI has also recently removed interest rate restriction of the prime lending rate being the floor rate for loans to retail and personal segment, which should provide further impetus to retail lending, the central bank said in the mid-term review of Monetary and Credit Policy in Mumbai on Monday.

• RBI's Monetary and Credit Policy : Complete Coverage

"Nevertheless, keeping in view the intense competition in this sector, banks need to sharpen their risk assessment techniques so as to guard against any adverse impact on credit quality", it said.

The public sector banks have reduced their deposit rates over one year from a range of 5.25-7.00 per cent in March 2003 to 5-6 per cent by October 2003.

"However, while lending rates for prime corporates and activities like housing have declined significantly, noticeable reduction is yet to take place in regard to other segments," the central bank added.

RBI said apart from subdued credit growth, which would continue to cause concern unless the anticipated pick-up materialises, the fact of overall rigidity in the downward movement of lending rates as well as inadequacy in quality of service to some sections coupled with reduction in deposit rates requires "introspection and immediate action on the part of all financial intermediaries."

Trends in the flow and composition of savings as well as availability of credit to some highly productive and socially critical sectors should be a matter of importance to all in the financial system, it said.

While credible actions, particularly by commercial banks, would be essential, innovative measures by all concerned may have to be considered in due course if adequate progress in credit delivery accompanied by appropriate transparency in credit pricing was not observed soon, the apex bank added.

On the PLR and spread, it clarified that since lending rates for working capital and term loans can be determined with reference to the benchmark PLR by taking into account term prima and or risk premia, a need for multiple PLR may not be compelling.

RBI also said that banks have the freedom to price their loan products based on time-varying term premia and relevant transaction costs. Banking entities may price floating rate products by using market benchmarks in a transparent manner.

As Indian Banks' Association has indicated broad agreement with approach for B-PLR, it may advise members, suitably, keeping in view the operational requirements, the apex bank added.

PTI