RBI tweaks upcoming lending rate rules

MUMBAI (Reuters) - The Reserve Bank of India said on Tuesday fixed-rate loans of up to three years offered by lenders will have to be set based on their marginal cost of funding, a move an analyst said was negative for the banks.

Previously all fixed-rate loans had been exempted from being set on this basis.

The tweak will apply to new rules the RBI will implement from April 1, which force lenders to base most of their lending rates on their marginal cost of funds and not the average cost of funds currently in use.

Religare Capital Markets Ltd analyst Parag Jariwala wrote in a note that the RBI's move would hurt banks' margins.

"Our interaction with bankers suggests that banks were thinking of using the fixed-rate loan approach to price working capital loans in order to avoid the margin impact," the brokerage said.

However, most of the working capital loans would now be linked to the marginal cost of funding, making them rate-sensitive. "This will affect margins in a downward interest-rate environment."

The RBI in December set new rules on how banks can calculate their lending rates, making them more closely based on market rates and removing some of the freedom lenders now enjoy, in order to allow quicker transmission of monetary policy.

(For details of the changes announced on Tuesday, see: bit.ly/1MPoSke)

(Reporting by Suvashree Dey Choudhury and Devidutta Tripathy; Editing by Rafael Nam and Mark Trevelyan)