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You might get the right loan as RBI moots external benchmark for lending

As of now, banks set lending rates based on marginal cost of lending rate formula, which RBI feels has not delivered effective transmission of monetary policy

Press Trust of India  |  Mumbai 

RBI governors
File photo of  Deputy Governors BP Kanungo, M D, Patra, ED, RBI, Deputy Governors N S Vishwanathan, RBI Governor Urjit Patel and Viral Acharya during a press conference announcing the RBI's monetary policy in Mumbai | Photo: Kamlesh Pednekar

The Reserve Bank today flayed lenders for keeping interest rates high and flagged concerns over base rate and marginal cost of fund-based (MCLR), saying these have not improved monetary transmission.

An internal group also suggested switching over to an external benchmark in a time-bound manner so that better rates are available to borrowers.

"The study group has observed that internal benchmarks such as the base rate/have not delivered effective transmission of the monetary policy," said in a report today.

The group was constituted by to study various aspects of the system from the perspective of improving the policy transmission.

introduced on April 1, 2016 after finding that the then prevailing base rate had failed to achieve the objectives of easier and faster policy transmission. Before the was rolled out, the banks were following a more rigid base rate system, which came into force on July 1, 2010 replacing the banks' prime

The study group submitted its report on September 25.

"Arbitrariness in calculating the base rate/and spreads charged over them has undermined the integrity of the interest rate setting process," the study group has observed.

The base rate/regime is also not in sync with global practices on pricing of bank loans, it said, adding that "the study group has, therefore, recommended a switchover to an external benchmark in a time-bound manner".

Addressing the media, Deputy Governor said the report has proposed three possible external benchmarks to which such lending could be tied to going forward.

"We think the internal benchmarks such as the base rate and MCLR, based on data, seem to give banks very high amount of discretion, lots of factors that are flexible to them to ensure that the can be kept high even if monetary policy is going down and accommodative," he said.

He also said the move is to address the above mentioned lacunae by bringing in a better global benchmark wherein these rates are tied to external benchmarks as "this will create a fair bit of transparency for borrowers and they can just compare two and see which is at the lower spread because the benchmark will be the same".

The report also suggests that "the interest rate resets, which are right now at an annual frequency, creating potentially a one-year lag in transmission, can be changed on all floating rate to quarterly resets so that transmission would be much faster once the monetary policy changes".

The central bank will release a detailed report of the study group later in the day to solicit comments from members of public and stakeholders.

will take a final view on the recommendations of the study group after taking into account the feedback received until October 25, 2017.

The previous governor Raghuram Rajan introduced the to calculate the benchmark in another attempt to make banks pass on policy rate cut benefits to borrowers quickly and in a more transparent manner.

Under the base rate and BPLR, banks were following individual methodologies for computing the minimum rate at which they could lend. Under the MCLR, asked all banks to follow the marginal cost of funds method to arrive at their benchmark

is calculated after factoring in banks' marginal cost of funds (largely, the interest at which they borrow money), return on equity (a measure of banks' profitability), and negative carry on account of cash reserve ratio.

Banks can review once a quarter till March 2017, after which they were asked to publish the on a monthly basis. Lenders have to specify the interest reset dates on their floating rate

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Wed, October 04 2017. 16:22 IST