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New loan pricing: RBI studying transition cost

The move came as the regulator has not been happy with the banks' reluctance to pass on the rate cuts to borrowers form quite some time now

Press Trust of India  |  Mumbai 

RBI office
RBI said the top 12 accounts, having an exposure of at least Rs 5,000 crore each, should be referred for bankruptcy proceedings

Deputy governor Viral Acharya has said the suggestions received on the recommendations of the study group on an external benchmark-based lending rate system are being carefully examined, keeping in view the transition cost to the system. Last month, the central had released a report by a study group that was tasked by the to suggest the pros and cons of shifting to an external benchmark based lending rate system aimed at fastening the transmission of policy rates by The move came as the regulator has not been happy with the banks' reluctance to pass on the rate cuts to borrowers form quite some time now. Currently price loans on the basis of their marginal cost of funds, which is in force since April 2016, replacing the base rate system that came into effect from July 2014 replacing the prime lending rate system of Each of these pricing systems changes were aimed at better transmission of the policy rates and make more transparent. "We've received a number of suggestions and comments on the report of the study group.

These are being examined factoring in transition costs and providing a calibrated path to the desired benchmarking system," Acharya said at a speech at the Tata Institute of Fundamental Research here last week. He said efficient monetary transmission is a sine qua non (a necessary condition) for the successful pursuit of its objectives by any central Over the past two decades, it has been RBI's endeavour to strengthen the monetary transmission process, but these efforts have yet not yielded the desired results, he said. "The transmission from the policy repo rate to lending rates, which is the dominant transmission channel in our country, has remained a matter of concern," he said. The study group said internal benchmark-based pricing regimes are not in sync with global practices on pricing of loans and recommended that the switchover to an external benchmark needs to be pursued in a time-bound manner. The report recommended that the treasury bill rates, the certificate of deposit rates, and the policy repo rates are better suited than other to serve the role of an external benchmark. "All floating rate loans from April 1, 2018 could be referenced to one of the three external benchmarks selected by the after receiving and evaluating the feedback from stakeholders," the report said. Acharya said there is a deeper economic issue at hand in the recommendation to move towards an external benchmark. He further said even as the has reduced its policy repo rate by 50 bps since October 2016 and a higher 200 bps since December 2014, credit has remained much muted. "While weak demand for credit could be one of the factors leading to this slowdown, a primary cause had also been the weak balance sheets of public sector in view of large NPAs which seem to have made risk averse and induced them to reduce the supply of credit," he said, adding under-capitalised state-run have capital only to survive, not to grow. The dominance of the supply side factor has also been borne out by the fact that credit growth of private sector remains robust, whereas there has been a sharp deceleration at public sector banks, the deputy governor said. Acharya said the IBC, Banking Regulation (Amendment) Ordinance 2017 and the subsequent actions taken by wherein it asked to refer the largest NPAs to IBC for resolution, etc have made the IBC a lynchpin of the new time- bound resolution framework for NPAs. These initiatives will now be supported by government decision to recapitalise state-run in a front-loaded manner, with a total allocation of Rs 2.1 trillion, comprising budgetary provisions (Rs 18,100 crore), recapitalisation bonds (Rs 1.35 trillion), and the rest Rs 58,000 crore to be raised from the markets by diluting government stake. "These two steps together--asset resolution and recapitalisation-are expected to strengthen balance sheets significantly and improve their ability to lend at rates in consonance with policy rates and result in an improved monetary transmission," Acharya said.

(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, November 22 2017. 02:21 IST
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