Skip to main content

RBI wants leading rates to be linked with external benchmark rates

RBI wants leading rates to be linked with external benchmark rates
Those who avail of home loans and personal loans could soon be on par with the big corporates when it comes to how banks calculate interest charges on borrowers. Interest rates on loans across the board would soon be benchmarked to external market rates as the banking regulator aims to put an end to opacity of loan pricing by banks.
A Reserve Bank of India committee headed by Dr Janak Raj has suggested that interest rate on loans be pegged to anyone of the three benchmark rates such as T-bill, certificate of deposit rate or the RBI's repo rate rather than leaving it to the discretion of each bank. It also suggested a ban on banks charging a conversion fee whenever the bank resets the rate of interest.
"Arbitrariness in calculating the base rate and MCLR and spreads charged over them has undermined the integrity of the interest rate setting process,'' RBI said in a statement.such as T-bill, certificate of deposit rate or the RBI's repo rate rather than leaving it to the discretion of each bank. It also suggested a ban on banks charging a conversion fee whenever the bank resets the rate of interest.
"Arbitrariness in calculating the base rate and MCLR and spreads charged over them has undermined the integrity of the interest rate setting process,'' RBI said in a statement. ``The base rate and MCLR regime is also not in sync with global practices on on pricing of bank loans."
Banks and the RBI have been at logger heads for over a decade with the regulator publicly stating that banks move interest rate in such a way that it benefits them. Banks have been quick to raise interest rates when the RBI raised policy rates, but were slow to cut when RBI did so.
"We think that the internal benchmarks like the base rate or the MCLR, based on data, seem to give banks a very high amount of discretion lot of factors that are flexible for them to ensure that lending rates can be kept high even when monetary policy rates are going down an accommodative path," deputy governor Viral Acharya told reporters.Data from the RBI shows that, between December 2014 and October 2016, a month before the demonetisation of Rs. 500 and  Rs. 1,000 notes, banks' Base Rate on an average reduced 0.61 percent when the policy rate was lowered by 1.75 percentage point.
Banks were slow to pass on the reduction in their MCLRs in January 2017 to their actual lending rates,'' said the report. ``Of the 12 banks whose spreads widened, six banks took up to six months to pass on the benefit of lower MCLRs to their lending rates; the remaining six banks passed on the benefit of their lower MCLRs, but only partially even after six months. This is intriguing as changes in MCLRs are expected to be passed on to at least fresh borrowers immediately.''
The report also suggested that interest rates resets which are now set at annual frequency creating potentially a one year lag in transmission that these be changed on floating rate loans to quarterly resets.This is done to ensure that the transmission will be much faster. As on now, banks have adopted marginal cost of lending rate (MCLR) formula where rates are linked to cost of their funds and are reset in different internals such as one month, six months to one year
`The Study Group is of the view that the decision on the spread over the external benchmark should be left to the commercial judgment of banks,'' the report said. ``However, the spread fixed at the time of sanction of loans to all borrowers, including corporates, should remain fixed all through the term of the loan, unless there is a clear credit event necessitating a change in the spread.''
The Economic Times, New Delhi, 18th November 2017

Comments

Popular posts from this blog

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

RBI rushes in to prop up falling rupee

RBI rushes in to prop up falling rupee India’s central bank reportedly intervened in the currency markets on Monday to prevent a further slide in the local unit, which breached the 67 mark to a dollar for the first time in 15 months amid a widening trade gap and runaway import bills fuelled by high crude-oil prices. Some state-owned banks were seen selling dollars aggressively, interventions that market dealers attributed to the central bank’s strategy to stem the decline of the Indian rupee against the US currency. The rupee is the worst performing among a dozen Asian monetary units in the past three months. It lost 4.25 per cent to the dollar during the period, show data from Bloomberg. On Monday, the Reserve Bank of India (RBI) is said to have sold about Rs 800 million collectively on the spot and exchange traded futures markets, dealers said. An email sent to RBI remained unanswered until the publication of this report. The currency market has seen such a strong central bank interven…

GST Refund of Rs 20,000 Cr Pending: Exporters’ Body

GST Refund of Rs  20,000 Cr Pending: Exporters’ Body Refund of over Rs 20,000 crore on account of Goods and Services Tax (GST) is pending with the government with more than half the amount stuck as input tax credit, Federation of Indian Export Organisations said on Tuesday. While claims over Rs7,000 crore were cleared in March, the amount was Rs 1,000 crore in April.However, after exporters’ request, the GST council and tax department are organizing a second phase of Special Refund Fortnight starting May 31, which will enable exporters to draw their refunds at a speedy pace. Many exporters have been unable to file the refund of input tax credit due to technical glitches, exports and claim happened in different months. The major challenge lies on ITC refund especially because the process is partly electronic and partly manual which is cumbersome and add to the transaction cost, the exporters’ body said. On IGST, refunds are getting delayed due to airline and shipping companies not submitt…