Skip to main content

'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

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…