RBI base rate calculation norms may help monetary policy: ICRA

Rating agency ICRA announced here today that Reserve Bank of India's draft guidelines for base rate computation may help monetary policy transmission, but affect banks' net interest margins in the short term.
"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 (NIMs) till the time their deposits get re-priced to lower levels (on a par with the marginal cost of funds) in a declining interest rate scenario," ICRA said in a report here.
According to RBI data for 2014, about 41 per cent of term deposits 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.

The report said 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, while 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.
According to Icra, assuming a 75 basis point decline in interest rate, annual interest income loss to banks (on lending operations) could be in the range of Rs 15,000 to Rs 22,000 crore.
The draft guidelines seems to follow RBI's concern that despite a 75 basis points cut in policy rate during the current fiscal, banks (on an average) lowered their base rates by merely 25-30 basis points.

"However, 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," the report said.