'Examine if rate cut benefits reach consumers'

The plea by an NGO cited an RBI report that found banks were not passing benefits of lower rates to customers

The plea alleged that by failing to take action on the petitioner’s repeated requests for justice on behalf of citizens, RBI had deliberately acquiesced in the discrimination by banks in the name of implementing the marginal cost of funds-based lending rate (MCLR) regime. From time to time, RBI has expressed concerns about the reluctance of banks to pass on rate cuts to consumers, and made several attempts to change the way they price their loans. In 2003, RBI introduced the benchmark prime lending rate (BPLR), but this failed to bring in transparency, as a large part of the lending took place at interest rates below the announced BPLRs.

Then came the base rate, which was to be the minimum rate for all loans and calculated on the basis of cost of funds. Individual borrowers were charged a spread over the base rate, which was tweaked to benefit only new borrowers. The drawbacks of these lending rates led RBI to introduce MCLR in April 2016. However, in the absence of a sunset clause on the base rate, banks were slow to migrate their customers to the MCLR regime. In October 2017, a committee under the central bank recommended linking bank lending rates to a market benchmark like T-bills, certificate of deposit or repo rate.

The panel noted that since April 2016, the one-year MCLR had come down by 95 basis points (bps), whereas the repo rate was down by 75 bps, but MCLR had been mostly used for fresh loans. However, the recommendation was opposed by banks, which felt that the regulator should also allow deposit rates to be linked to an external benchmark if it wanted to apply such a benchmark to lending rates. As interest rates started going up after April 2018, the noise around transmission lag abated.

“Benefit of repo rate cut was passed on to fresh borrowers. Existing borrowers did not see a cut in borrowing rates. These switching costs were also charged, prohibiting existing borrowers from switching base rate to MCLR, thereby denying the benefit of lower MCLR to existing borrowers,” said Anul Gupta, sector head, financial sector ratings, Icra Ltd. “Though RBI’s proposal was to link lending rate to external benchmark, in the rising interest rate scenario, it would have led to faster repricing even though the downside was denied to existing borrowers.” Gopika Gopakumar in Mumbai contributed to this story.

The Mint,09th October 2018