cost of funds and transaction costs. the plr was, thus, expected to act as a floor for lending above ` 2 lakh. however, the experience with its working was not satisfactory mainly for two reasons : ( i ) both the plr and the spread charged over the plr varied widely, and inexplicably so, across banks ; and perhaps more importantly, ( ii ) the plrs of banks were rigid and inflexible in relation to the overall direction of interest rates in the economy. in view of these concerns, the reserve bank advised banks in april 2003 to announce benchmark plrs ( bplrs ), taking into account the cost of funds, operational costs, minimum margin to cover regulatory requirements ( provisioning and capital charge ), and profit margin. the bplr system also fell short of its desired objective of enhancing transparency and serving as the reference rate for pricing of loan products, with a large part of the lending taking place at interest rates below the announced bplrs. the share of sub - bplr lending was as high as 77 per cent in september 2008, rendering it difficult to assess the transmission of policy rate changes of the reserve bank to lending rates of banks. the residential housing loans and the consumer durable loans were outside the purview of the bplr. as such, sub - bplr lending became a major distortion in terms of cross - subsidisation across borrower categories. next, the drawbacks of the bplr system led to the introduction of the base rate system in july 2010. the base rate was also based, inter alia, on the costs of borrowed funds ; an indicative formula for arriving at the base rate was also provided. the base rate was to be the minimum rate for all loans ( except for some specified categories ) with the actual lending rate charged to the borrowers being the base rate plus borrower - specific charge or spread. in practice, the flexibility accorded to banks in the determination of cost of funds – average, marginal or blended cost – caused opacity in the determination of lending rates by banks and clouded an accurate assessment of the speed and strength of the transmission. moreover, banks often adjusted the spread over the base rate to benefit the new borrowers while leaving the transmission through the base rate weak for existing borrowers. the weaknesses and rigidities observed with the transmission under the base rate system led to the present system, i. e., the mclr system effective april 1

xiang junbo : exclusive interview with the people ’ s daily xiang junbo, deputy governor of the people ’ s bank of china, in a recent interview with a reporter of the people ’ s daily. * * * reporter : the establishment of the people ’ s bank of china ( pbc ) shanghai head office has drawn broad attention from the financial circle and the media. thank you for having this interview with us to answer questions of common concern. xiang : thank you. as you said, the establishment of the pbc shanghai head office has been widely covered by the media. i have read the relevant reports and commentaries. i would like to thank the press for their concern and support for the pbc shanghai head office. reporter : since china adopted the reform and opening - up policy, the central bank has undergone several institutional changes. in 1984, the state council decided to have the pbc act solely as a central bank. in 1995, the law of the people ’ s republic of china on the people ’ s bank of china legally confirmed the central bank status of the pbc. in 1998, the pbc dismantled its provincial branches and set up regional branches. in 2003, the banking supervisory function was transferred from the pbc to a separate regulatory institution. does the establishment of the pbc shanghai head office constitute another important institutional reform of the pbc? and what impact it will have on china ’ s financial sector? xiang : since the reform and opening up and with the gradual improvement of the socialist market economy, the central bank has been undergoing institutional changes. the establishment of the pbc shanghai head office is an important step to improve the central bank system and to strengthen the role of the central bank in macroeconomic management. with the shanghai head office established, the pbc will enhance its macro - adjustment and service capability by facilitating the development of the financial markets and financial center. as governor zhou xiaochuan pointed out at the inauguration ceremony of the pbc shanghai head office, as the economy gets increasingly market - oriented and transportation and communication further improve, cross - regional economic activities will increase, and financial markets and financial services will increasingly benefit from economy of scale. the development of financial center indicates strong international competitiveness and significant improvement in the efficiency of financial services. the financial sector including the central bank needs to improve their functions by focusing on the development of financial markets and financial centers. shanghai has become the hub to various financial institutions. the national unified inter - bank lending market, bond market