Deregulation of interest rates in India: History and Basics

Deepak Mohanty, ED of RBI gives a superb speech on the topic.

Here is a table showing how interest rates were deregulated in India:

Table 1: Evolution of Lending Rate Structure in India
Sep. 1990 The structure of lending rates was rationalized into six size-wise slabs. Of these, banks were free to set interest rates on loans of over Rs.2 lakh with minimum lending rates prescribed by RBI.
Apr-92 Slabs compressed into four.
Apr-93 Slabs compressed into three.
Oct. 1994 Lending rates for loans with credit limits of over Rs. 2 lakh deregulated.
  Banks were required to declare their Prime lending rates (PLRs).
Feb. 1997 Banks allowed to prescribe separate PLRs and spreads over PLRs, both for loan and cash credit components.
Oct. 1997 For term loans of 3 years and above, separate Prime Term Lending Rates (PTLRs) were required to be announced by banks.
Apr-98 PLR converted as a ceiling rate on loans up to Rs.2 lakh.
Apr-99 Tenor-linked Prime Lending Rates (TPLRs) introduced.
Oct. 1999 Banks were given flexibility to charge interest rates without reference to the PLR in respect of certain categories of loans/credit.
Apr-00 Banks allowed to charge fixed/floating rate on their lending for credit limit of over Rs.2 lakh.
Apr-01 The PLR ceased to be the floor rate for loans above Rs. 2 lakh.

Read the speech to understand the transition. He also shows the relation between lending rates and growth…

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