RBI, banks differ on calculation

Bankers call repo rate a blunt tool, cite practical difficulties in moving towards marginal cost of funds-based method

The Reserve Bank of India (RBI), in its policy statement, said it would encourage banks to move in a time-bound manner towards a marginal cost of funds-based determination of their base lending rate.

Bankers cite practical difficulties. Aditya Puri, managing director (MD), HDFC Bank, said they normally used the marginal rate when there was sufficient liquidity at that point to fund a reasonable proportion of the portfolio. “If the system is such that we don’t have a major debt market, we don’t have a commercial paper market and funding of banks is not from money markets, obviously we will move towards that. But it will not move instantly, though it is the right way to go,” said Puri at a bankers’ press conference after the RBI announcement.

RATE MATTERS

• RBI has said for monetary transmission to occur, lending rates have to be sensitive to the policy rate
• With introduction of the base rate on July 1, 2010, banks could set their actual lending rates on loans and advances with reference to the base rate
• At present, banks follow different methods in computing their base rate — on average cost of funds (liabilities), marginal cost or blended cost

He added this had to be carefully deliberated, to ensure the transmission came through in a fair manner to all the parties concerned, banks included.

RBI has said for monetary transmission to occur, lending rates have to be sensitive to the policy rate. With introduction of the base rate on July 1, 2010, banks could set their actual lending rates on loans and advances with reference to the base rate. At present, banks follow different methods in computing their base rate — on average cost of funds (liabilities), marginal cost or blended cost.

Arundhati Bhattacharya, chairman of State Bank of India, said a deposit is taken at a particular cost. “To re-price the entire asset base on the basis of marginal costing itself would be something that even if we think about doing will have a long transition. It cannot happen tomorrow. When the rates go down, depositors would start getting much less. When rates go up, borrowers will have to pay much more. How to balance all of it is what we have to see,” she said.

The bankers said only a repo rate cut would not lead to transmission. Credit demand and liquidity in the system played an equal role. RBI in its Urijit Patel committee report has also accepted that the repo is not a sharp but a blunt tool.

Bhattacharya also said repo was a blunt tool —for banks, the amount of resources they raise from short-term market borrowings are as low as one per cent. “So, we have to allow all the other factors to play into the economy. Given the easing cycle, rates are definitely going to come down,” she added.

The bankers at the press conference also pointed to how competing instruments (like Public Provident Fund and Sukanya Samriddhi Scheme) with better tax incentives and higher interest rates had meant little room for lowering of rates by banks. Booming capital markets were also credited for a fall in deposit growth. The cost of deposits, they said, would also need to come down for a cut in the base rate.

Puri explained the base rate was a function of the deposit cost. If the latter does not go down, there would not be a base rate cut. “If the cost goes down, there will be a cut. First, we will reduce deposit rates, then we calculate the base rate.”

However, retail deposits are still seeing good growth. Chanda Kochhar, MD of ICICI Bank, said while deposit growth has been slower, retail deposit growth has not been slower. “Investors are investing in retail fixed deposits. Some amount of deposit rate cuts have started since November. It is an easing interest rate scenario,” she added.

Among other issues, T M Bhasin, chairman of Indian Banks’ Association and MD & chief executive officer of Indian Bank, said with respect to corporate balance sheets, they needed to ascertain how much of natural hedge was available and how much foreign exchange hedge was needed. He said they’d taken this up with the department of financial services.

“Provision should be made in corporate balance sheets, where they declare how much forex hedge they need, how much is naturally available and how much they will need to take through banks,” he said.