RBI panel to review banks’ lending rates
The Reserve Bank of India (RBI) on Wednesday said it will set up a panel to review banks’ benchmark lending rate, after it noticed that lenders were not fully passing on reductions in the policy rate. This committee will also look at the possibility of linking the marginal cost of funds-based lending rate (MCLR) to a market-determined benchmark rate.
Expressing dissatisfaction over the rate cut transmission, the RBI said that the movement in the base rate—the benchmark prior to the introduction of MCLR and to which most of the floating loans of banks are tied—has been even smaller.
“While the extent of change in base rate may not necessarily mirror the revision in MCLR, the rigidity of the base rate is a matter of concern for an efficient transmission of monetary policy to the real economy. Given a large part of the floating rate loan portfolio of banks is still anchored on the base rate, the RBI will be exploring various options in the near future to make the base rate more responsive to changes in cost of funds of banks,” said RBI in the statement.
Since January 2015, policy rates have come off by 175 basis points (not accounting for Wednesday’s rate cut), while SBI’s base rate dropped by just 65 basis points during the same period. A basis point is one-hundredth of a percentage point.
On the other hand, SBI’s MCLR has dropped 120 basis points (and the median for all banks by 92 basis points), in comparison to the policy rate cut of 50 basis points during the same time period. The MCLR came into existence in April 2016.
Banks not passing on the policy rate cut has been a long standing grouse of the central bank. This will be the third review of the benchmark bank lending rate in seven years. In 2009, the central bank set up a working group under RBI executive director Deepak Mohanty to review the benchmark prime lending rate (BPLR), after concerns were raised over the lack of transparency in calculation of lending rate and banks lending below the BPLR.
The group then recommended what is called a base rate, which is a common rate based on the banks’ cost of funds. This too, failed to satisfy the RBI as policy transmission continued to be ineffective. In April 2015, RBI introduced marginal cost of funds-based rate, to be introduced a year later.
While banks have dropped the MCLR significantly more than the base rate, the RBI is still unhappy. In its 2015-16 annual report, it noted banks have increased the risk premia loading on new customers, thereby “attenuating the transmission to actual lending rates charged to customers”.
“Banks may have been loading (i) a higher credit risk premia on their new customers in order to attain their desired return on net worth in a rising NPA environment; and/or (ii) a higher strategic risk premia on their riskier loans as part of their business strategy to reorient their lending operations towards less risky activities. The consequent rise in the spread is reflected in a near unchanged WALR (weighted average lending rate) in respect of both outstanding and fresh rupee loans during 2016-17 so far (up to June),” the annual report said.
Bankers feel that the current system of MCLR is reasonably responsive and linking to a market rate could lead to interest rate risk.
“If loan rates are linked to market benchmarks, banks will also look to link deposit rates in order to avoid impact on the net interest margin. Considering the average deposit base of banking system, which is around two years, the re-pricing of the entire liabilities will take around 18-24 months,” said N.S. Venkatesh, executive director at Lakshmi Vilas Bank.