Skip to main content

Dynamic base- rate pricing to help new borrowers

By
RBI to allow computation of banks ’base rates on the basis of marginal cost of funds
In a move aimed at ensuring faster transmission of rate revisions, the Reserve Bank of India ( RBI) is set to release its final guidelines on computation of banks’ base rates on the basis of marginal cost of funds. These guidelines, allowing dynamic pricing of loans as suggested by banks, are likely to benefit new customers.
One suggestion made by the bankers’ lobby — there are indications that RBI has taken it seriously — is that pricing of loans should be changed on the basis of market- linked yields, with a clause for reset every quarter or year. While it is not yet clear whether the yields taken into consideration will be on adaily basis or an average, dynamic pricing of loans will be tricky business for borrowers, who will also have to time their borrowings according to money markets and the view on interest rates. That is because the rate could be reset only after a quarter or a year of a loan being taken, say sources familiar with the proposal. While retail customers might still have some uniform pricing protection, big loans will shift to this variablerate regime.
However, not all banks have an equal exposure to the money market and, as such, the cost of deposit will also differ among banks, making competition stiffer.
For example, say a bank’s cost of deposit on January 1 is eight per cent, and the bank decides to add a spread of two percentage points for loans given to a customer, at 10 per cent.
Now, on February 1, if the bond yields have fallen and the bank’s cost of deposits has fallen to 7.50 per cent, keeping the spread intact at two percentage points, the bank will give a fresh loan to another customer at 9.50 per cent.
The old customer cannot avail of the rate benefit as the loan will be reset only after a quarter. However, both customers will not have to wait for the bank to lower its base rate.
Business Standard, New Delhi, 7th Dec. 2015

Comments

Post a Comment

Popular posts from this blog

Household debt up, but India still lags emerging-market economies: RBI

By
  Although household debt in India is rising, driven by increased borrowing from the financial sector, it remains lower than in other emerging-market economies (EMEs), the Reserve Bank of India (RBI) said in its Financial Stability Report. It added that non-housing retail loans, largely taken for consumption, accounted for 55 per cent of total household debt.As of December 2024, India’s household debt-to-gross domestic product ratio stood at 41.9 per cent. “...Non-housing retail loans, which are mostly used for consumption purposes, formed 54.9 per cent of total household debt as of March 2025 and 25.7 per cent of disposable income as of March 2024. Moreover, the share of these loans has been growing consistently over the years, and their growth has outpaced that of both housing loans and agriculture and business loans,” the RBI said in its report.Housing loans, by contrast, made up 29 per cent of household debt, and their growth has remained steady. However, disaggregated data sho...
Post a Comment
Read more

External spillovers likely to hit India's financial system: RBI report

By
  While India’s growth remains insulated from global headwinds mainly due to buoyant domestic demand, the domestic financial system could, however, be impacted by external spillovers, the Reserve Bank of India (RBI) said in its half yearly Financial Stability Report published on Monday.Furthermore, the rising global trade disputes and intensifying geopolitical hostilities could negatively impact the domestic growth outlook and reduce the demand for bank credit, which has decelerated sharply. “Moreover, it could also lead to increased risk aversion among investors and further corrections in domestic equity markets, which despite the recent correction, remain at the high end of their historical range,” the report said.It noted that there is some build-up of stress, primarily in financial markets, on account of global spillovers, which is reflected in the marginal rise in the financial system stress indicator, an indicator of the stress level in the financial system, compared to its p...
Post a Comment
Read more

Retail inflation cools to a six-year low of 2.82% in May on moderating food prices

By
  New Delhi: Retail inflation in India cooled to its lowest level in over six years in May, helped by a sharp moderation in food prices, according to provisional government data released Thursday.Consumer Price Index (CPI)-based inflation eased to 2.82% year-on-year, down from 3.16% in April and 4.8% in May last year, data from the Ministry of Statistics and Programme Implementation (MoSPI) showed. This marks the fourth consecutive month of sub-4% inflation, the longest such streak in at least five years.The data comes just days after the Reserve Bank of India’s (RBI) Monetary Policy Committee cut the repo rate by 50 basis points to 5.5%, its third straight cut and a cumulative reduction of 100 basis points since the easing cycle began in February. The move signals a possible pivot from inflation control to supporting growth.Food inflation came in at just 0.99% in May, down from 1.78% in April and a sharp decline from 8.69% a year ago.A Mint poll of 15 economists had projected CPI ...
Post a Comment
Read more