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Dynamic base- rate pricing to help new borrowers

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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

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