RBI to review MCLR regime soon as banks sit tight on rates

Reserve Bank today said it will soon review the new lending regime based on marginal cost of funds that became effective from April this year.
"Transmission of policy into bank lending rates still remains work in progress. We will shortly review the operation of the marginal cost lending rate framework to iron out any issues," Governor Raghuram Rajan said in the second bi-monthly monetary policy review here.
The RBI had asked banks to move to the new lending rate regime to ensure they pass on the benefits of RBI's rate cuts to their customers at a faster pace. But even after two months, the average lending rate has come down only by 30-35 bps.

At the post-policy meeting with the reporters, Rajan said, "Review will suggest that we need to assess what are the aspects that are working well, which are the aspects that are rigid that we need to take further action on."
The Governor said there is a paucity to some extent of credit demand from usual sources, which is why the banks are not in a great hurry to reduce rates either.
"The banks seem to be suggesting they are not going to attract a whole lot of new credit if they reduce rate, so why not stay with the existing borrowers and so on. That was why we moved from the base rate to MCLR because that would mean a more automatic reduction in rates when deposit rates came down," Rajan said.

He said in April-May, the credit growth was not very strong but deposit growth has been fairly sound.

"My hope is as deposits keep building up on the liability side, banks will find a need to make those deposits go to work other than through investment in government securities. They actually start making more loans and they look for borrowers and therefore start reducing rates more."
The RBI chief said he does not want to pronounce judgement immediately on MCLR (marginal cost of funds based lending rate).
"We will see as we get a little bit of experience, is it working as advertised and are the banks then passing through rates into lower rates for customers."

Asked why RBI is not looking at introducing sunset clause for MCLR as in the case of base rate in the past, Rajan said the central bank does not want to interfere in a contractual process in the interim.
"It will create all sorts of difficulties. A number of contracts have been written on the base rates at some point in time. For us to say base rate is going to end today would not be appropriate," he said.