PLR

 PLR or prime lending rate is the rate of interest at which banks lend to their credit-worthy or favoured customers. It is treated as a benchmark rate for most retail and term loans.

The RBI does not set these rates, but in a broad way stipulates the interest rates in the economy. The banks are at liberty to lend at a rate above or below the RBI’s.

The PLR is influenced by RBI’s policy rates — the repo rate and cash reserve ratio — apart from the bank’s policy. In simple words, availability of funds in the banking system and demand for credit by consumers (both retail and industrial) determine what the PLR should be.

Significance

 Excessive money in the economy leads to inflationary trends. To control inflation, government may curb the money supply by increasing the lending rates or PLR. When RBI increases the PLR, banks may follow suit, making borrowing a costlier affair.

This hike in lending rates is bound to negatively impact businesses/industries which depend on banks for their working capital and expansion requirements.