Banks have special offers where they reduce rates on the home loans as well as car loans
Bankers say linking the lending rates to an external benchmark would mean that even deposit rates would move in tandem with the lower lending rates so that banks stay profitable and take care of their credit costs.
Bankers have time until October 25 to decide on what benchmark they can peg their loans on.
Rajnish Kumar, chairman-designate, State Bank of India (SBI), said in a media concall that the benchmark rate should apply to both assets and liabilities. "It cannot be a one-sided affair. Any change in the methodology should ensure that the pricing of the loan product and liability product will have to move in tandem. We will pass on whatever benefits that should be passed on to the customers."
Emphasising that the margin (net interest margin) needs to be sufficient to take care of credit costs, Kumar said SBI is all for transparency in the pricing regime of loans.
"If we have any cushion whatsoever to pass on the (interest rate) benefit to the customer, we will do it proactively. But at the same time we have to recover our credit costs," he said.
Harsh Roongta, an investment adviser, told DNA Money, "Banks have a justification that deposit rates are fixed so the lending rates cannot be so agile. But then this should apply when the lending rates go down as well. RBI internal committees have found that when policy rates go up banks immediately hike lending rates but when policy rates come down the same principle is not adhered to which is why the internal committee of RBI is suggesting an external rate which will make no distinction between old and new customers."
The RBI internal study group has suggested linking the bank lending rates to the short-term government bonds like the T-Bill rates, certificate of deposit rates, the deposits that banks raise from the money market or the RBI's policy repo rate. The group has also suggested that when the external benchmark is determined then all borrowers should be allowed to seamlessly move into the new system without charging any conversion fee by the banks.
Banks have special offers where they reduce rates on the home loans and car loans of the new customers while not giving the benefit of lower rates to their older customers. Even monetary transmission fails to happen especially in an interest rate falling regime.
Now banks have three parallel rates the prime benchmark lending rate, the base rate and the marginal cost based lending rates (MCLR), with the latter two being the floor price below which the banks cannot lend. But the methods of calculating these rates the base rate and the MCLR are opaque resulting in the bank lending rates being higher than most money market rates also the policy rate of RBI (repo rate) which is considered to be the signalling rate. Repo rate is the rate at which RBI lends overnight money to banks by pledging government bonds.
HAND IN HAND
- Banks have special offers where they reduce rates on the home loans as well as car loans
- Bankers have time until October 25 to decide benchmark to peg loans
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Emphasising that the margin (net interest margin) needs to be sufficient to take care of credit costs, Kumar said SBI is all for transparency in the pricing regime of loans.
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