While banks have reduced their prime lending rates (PLRs) to some extent and are also extending sub-PLR loans, effective lending rates continue to remain high (Table 1 and Graph 1). It is estimated that the average lending rate of scheduled commercial banks has declined from a peak of about 17 per cent in 1995-96 to about 14 per cent by 2001-02.
Hence, while nominal interest rates have come down, they have not fallen as much as the inflation rate. Consequently, the effective real lending rate continues to remain high. This development has adverse systemic implications, especially in a country like India where interest cost as a proportion of sales of corporates are much higher as compared to many emerging economies.