Banks could soon lose some of their freedom to fix lending rates. To ensure that banks’ lending rates are more sensitive to changes in the monetary policy rates, the Reserve Bank of India on Tuesday issued draft guidelines, prescribing a uniform method by which they have to arrive at the interest rates for providing loans.
Though this could ring in transparency in the pricing of loans, banks are expected to oppose the proposed move.
The central bank said it will encourage banks to move, in a time-bound manner, to the so-called marginal-cost-of-funds-based determination of their minimum lending rates. Using this methodology, the base rates of banks could soften a tad, going by the easy liquidity in the banking system currently. This could also reduce the lag between changes in deposit rates and lending rates.
The RBI has been asking banks to start passing on central bank rate cuts quickly. The RBI has cut the repo rate three times by a total of 75 basis points this year, but most banks have lowered their base lending rates by only around 30 basis points.
The RBI has proposed to fix April 1, 2016, for implementing the new methodology. This will give sufficient time to all banks to adopt the new base rate methodology as well as the spread guidelines. Banks will have to submit a roadmap clearly indicating the time frame for adopting the new methodology within a period of two months from the date of the final circular. The central bank has sought stakeholders’ feedback on or before September 15, 2015.
The RBI said the marginal cost of funds should be arrived at by taking into account all sources of funds other than equity. Cost of deposits should be calculated using the latest interest rate payable on deposits (current, savings and term) of various maturities.
Further, the cost of borrowings should be arrived at using the average rates at which funds were raised in the last one month preceding the date of review. Each of these rates should be weighted by the proportionate balance outstanding on the date of review.
Currently, banks, according to their convenience, are using three methods for calculating the cost of funds — average, blended, or marginal.
Difficult to adjustA senior public sector bank official said: “It will be difficult for banks to make ‘adjustment’ in the base rate once the new guidelines kick in. They could get away by pegging the base rate to the cost of six months term deposits, which constitute probably 10 per cent of total deposits. The only issue that the central bank needs to clarify is whether banks have to take into account residual maturity of deposits or contractual maturity while arriving at cost of funds.”
Banks, according to the RBI, should delineate the components of spread (charged over the base rate) with the approval of their boards. For the sake of uniformity in these components, broad components of the spread finalised by the Indian Banks’ Association should be adopted by all banks.
The RBI said it is expected that the new base rate guidelines would be helpful in the medium term goal of banks pricing their floating rate loans linked to an external benchmark.
Once Financial Benchmarks India Pvt Ltd (FBIL) starts publishing various indices of market interest rates, banks will be encouraged to price their deposits as well as advances with reference to the external benchmarks published by the FBIL.