Master Circular on Interest Rates for Advances (2005)

What changed

RBI issued a consolidated Master Circular replacing the July 2004 version, incorporating all instructions issued up to June 30, 2005. The circular reaffirmed that BPLR is the ceiling for loans up to ₹2 lakh and allowed banks to offer loans below BPLR to creditworthy borrowers like exporters based on board-approved policies. It also discontinued the tenor-linked PLR system, requiring banks to set a single benchmark PLR factoring in cost of funds, operating expenses, and regulatory margins.

What it means for you

Banks must continue to cap interest rates on loans up to ₹2 lakh at their declared BPLR, protecting small borrowers. For larger loans, banks have flexibility to price below BPLR for low-risk clients, enabling competitive pricing. The shift to a single BPLR simplifies rate setting but demands transparent cost-based calculations, impacting profitability and loan pricing strategies.

What banks were required to do at the time

• Ensure all loan accounts up to ₹2 lakh carry interest not exceeding your bank's declared BPLR.
• Adopt a board-approved transparent policy for offering loans below BPLR to exporters or other creditworthy borrowers.
• Calculate BPLR based on actual cost of funds, operating expenses, and minimum margin for provisioning and profit.
• Discontinue any tenor-linked PLR systems and use a single benchmark PLR with spreads for term and risk premia.
• Display the BPLR uniformly across all branches and update the schedule of interest rates as per Annexure-I.

Who it affects

All Scheduled Commercial Banks (excluding RRBs and LABs), Borrowers with credit limits up to ₹2 lakh, Exporters and other creditworthy borrowers eligible for below-BPLR rates, Bank treasury and credit policy teams