Banks are divided over the Reserve Bank of India's move to evolve a benchmark prime lending rate, saying it may not be feasible to smaller financially sound banks and the rate should be pegged to the average returns on government papers.

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Referring to structural imbalances between deposit and lending rates due to administered rates in small savings, top bankers told PTI that a uniform PLR will result in bigger banks earning higher spread as their cost of deposits is lower.

"Having a benchmark PLR is not only unwieldy but it will also create islands of prosperity," they said, reasoning that cost of deposits does not fully reflect the competency of a bank.

RBI has asked the Indian Banks Association to work out a formula to arrive at a transparent benchmark PLR based on various parameters like cost of borrowing, operational cost, non-performing assets and profit margin.

Going by these parameters, senior bank officials said bigger banks like State Bank of India would have a lower benchmark PLR than smaller banks like UTI Bank and Oriental Bank of Commerce, which are otherwise financially sound with low operating costs and NPAs.

"It makes little sense to benchmark PLR, when banks are lending to top corporates and agriculture at sub-PLR. If at all we need to have a benchmark PLR, it should be linked to average yield on government securities," a bank CMD said.

With average return on 10-year G-secs and even "AAA" rate corporate debt papers at less than six per cent, the banker said it would not be worthwhile to peg PLR based on other parameters.

Most of the financially sound banks favour cost-income ratio as a preferred parameter to benchmark PLR.

Bankers said competency of a bank is better judged by its cost-income ratio, which shows the real opportunity costs that have to be taken as indicator for calculating EBITDA (Earning before Interest, Taxes, Depreciation and Amortisation).

"Unfortunately, only of late, the banks have started showing their cost to income ratio and to that extent the market is yet to mature," a banker said.

They said earning potential per se of banks will be uniform, considering the possible areas and the exploitation, but what matters is the interest part since depreciation and taxes are "exogenously pre-determined" parameters.

Some of the banks, whose NPAs are high, would in fact end up with a higher benchmark PLR leading to further squeeze in lending activities.

Considering the high cost of transactions of public-sector banks in the absence of 100 per cent computerisation and ATM networks, the private and foreign banks stand to gain in the era of benchmark PLR, bank officials said.