The central bank while unveiling the first monetary policy of the new fiscal (2019-20) said that more discussions were required before arriving at a consensus
Reserve Bank of India (RBI) has postponed its decision to peg all floating rate loans such as home, car and SME loans to external benchmarks. The central bank while unveiling the first monetary policy of the new fiscal (2019-20) said that more discussions were required before arriving at a consensus.
RBI governor Shaktikanta Das said in a post policy press conference, "Banks have been raising concerns on the pricing of the deposits so work is in progress." He, however, did not give a timeline when the external benchmarks would come into place.
"Taking into account the feedback received during discussions held with stakeholders on issues such as (i) management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and (ii) the lead time required for IT system upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates, " RBI said in its statement.
The reason for pegging the floating loan rates to an external benchmark was to bring about faster transmission in interest rates. The issue was that the banks were not transmitting the lower rates to the borrowers when RBI cut the rate at which it lent to the bank (repo rate). Banks, on the other hand, said that only a small portion of their funds get impacted when RBI cuts rates. Cost of funds become cheaper only to the extent of their borrowing from the central bank. "More than 50% of our deposits are term deposits, which can be repriced only when the term comes to an end. This makes it difficult to lower rates. RBI is insisting on lowering the rates, but it cannot be at the cost of our earnings," said a banker.
The idea behind the move was to price the loans in tandem with the RBI interest rates. Currently, the pricing of loans is based on the internal benchmarks, i.e., base rate, benchmark prime lending rate (BPLR) and marginal cost of funds based lending rate (MCLR).
"The decision to defer the benchmarking of lending rates on smaller loans to external benchmarks was expected to improve transparency in rates for the borrowers, even though it would have created challenges for the banks, given that the liabilities for Indian banks are largely fixed rate in nature. In our view, increased depositor education to improve their acceptability of floating rate deposits needs to done first before moving on to external benchmarking of loans and mitigate the interest rate risks for the banks," Anil Gupta, sector head financial sector ratings at Icra, said.
However, SBI has announced its plan for linking interest rates on savings accounts having balances above Rs 1 lakh and overdraft, cash credit accounts to the repo rate in a partial manner from May 1, 2019.
In December the central bank had announced its move to link all the floating rates, personal or retail loans (housing, auto, etc) and micro and small enterprises, to any of the four external benchmarks. The move to link rates on retail and personal loans was supposed to come into effect from April 1, 2019. The central bank has also proposed four external benchmarks, including Government of India 91 days Treasury Bill yield produced by Financial Benchmarks India Private Ltd (FBIL) or any other benchmark rate produced by FBIL.
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