Computing base rate by marginal cost method to cause Rs 22,000-cr income loss to banks: ICRA

The RBI proposes to implement the computation guidelines with effect from April 1, 2016

Banks might incur income loss of up to Rs 22,000 crore due to a 75 basis points (bps) drop in interest rate if they use marginal cost methodology to fix base rate, according to rating agency ICRA.

At the lower end, the income loss could be about Rs 15,000 crore, ICRA’s estimates showed.

The Reserve Bank of India (RBI) had on September 1 issued draft guidelines on computation of base rates based on the above-mentioned methodology. The central bank proposes to implement the guidelines from April 1, 2016 and banks have to present the roadmap to meet the guidelines within two months from the date of the final notification.

While the draft norms hold the potential to improve the efficiency of monetary policy transmission, banks would have to bear the cost in the form of lower net interest margins till the time their deposits get re-priced to lower levels in a declining interest rate scenario.

According to the RBI data for 2014, as much as 41 per cent of term deposits (24-26 per cent of the total funds) have less than one year residual maturity, while the proportion of base rate linked advances could be as high as 80 per cent of total advances (50-55 per cent of total funds).

In a declining interest rate scenario, over a one-year horizon, banks would be able to get 20-22 per cent of the funds at a cheaper rate. On the asset side, 50-55 per cent of their assets would start earning less as soon as the banks adjust their deposit rates down, ICRA added.

RBI’s draft guidelines seemed to flag the central bank’s concern that despite a 75 bps point cut in the policy rate in the current financial year, banks on an average lowered their base rates by 25-30 bps. Lagged monetary policy transmission is attributed primarily to lag in re-pricing of banks’ term deposits on account of the difference in the pricing cycle of deposits and advances, it noted.