RBI wants banks to cut base rates, not select lending rates

MDT/PTI 06 August 2012

Banks are not able to respond quickly to the changes in monetary conditions or monetary policy signals because they carry a fixed cost over an extended period of time says the RBI

Mumbai: With banks led by the country's largest lender State Bank of India (SBI) choosing to cut spreads on certain categories of loans instead of the base rate, Reserve Bank of India (RBI) deputy governor Anand Sinha today said the central bank would like the banks to cut the minimum lending rate to better carry forward its monetary policy measures, reports PTI.

"The base rate is supposed to be responsive to the changes in monetary conditions....Reserve Bank would definitely want the responses to be through the base rate," Sinha said at an IDBI Bank event.

Sinha further said an RBI committee on interest rates, headed by him, is looking into these aspects.

The committee, supposed to come out with report last month, has made progress and will be submitting it soon.

Replying to a question, Sinha said banks are unable to cut their base rates as per the monetary policy changes, because they carry the burden of fixed rate deposits and fixed costs to service that over a longer-time.

"Banks are not able to respond quickly to the changes in monetary conditions or monetary policy signals because they carry a fixed cost over an extended period of time," he said, flagging this as a subject of discussion with bankers during deliberations on floating deposit rates.

On asked if the RBI-- which has been discussing floating rate deposits but also stressing fixed rate loans -- is concerned over potential asset liability mismatches, Sinha replied in the affirmative.

"Asset liability concern, in the long-term, yes," he said, adding that so far banks have been successful in managing the longer gestation infrastructure projects.

Though, since January, the RBI has cut repo rate by 50 bps and CRR by 125 bps, and a 100 bps SLR cut last week, the effect of the same has not been passed on to the customers by banks by lowering interest rates as a whole.

Instead, banks have been cherry-picking interest rates reduction, and have not lowered their base rates, which would automatically lead to a similar reduction in interest rates for both existing as well as the new customers.

Some banks like State Bank and Union Bank of India, among others, have slashed interest rate on certain loan products like home loans and lending to SMEs, but have not cut the base rate, or the minimum rate of lending.

On the proposed spectrum auction, Sinha did not give direct reply to the question whether the spectrum could be taken as a collateral by banks lending to bidding telcos.

"If I recall, we had put some conditions around it.

Essentially, these are valuation-related issues, the fact that it should be available to the banks in case there is a default, something like that," Sinha said.

Comments

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M G WARRIER

1 decade ago

Before deregulation of interest rates, there were multiple interest rates in existence. Post-deregulation RBI and banks have experimented several methods to bring transparency and order in the interest rate regime. The media and the banks give an impression to the common man that interest rates on deposits and advances are directly related to RBI’s base rates which are announced by the central bank as part of monetary policy exercise. Although these rates do have an impact on banks’ interest rates, such impact is slow and sometimes the scenario changes even before the guidance percolates to the ground level. The floating interest rate system now being debated is worth a trial. In any case, the present confusion from which only the banks take advantage and give less to small depositors from whom major portion of the deposits are collected and take more from borrowers who do not have a ‘voice’ to protect their interests needs to be removed.

Dayananda Kamath k

1 decade ago

banks have changed spread than base rate becasue they can fool the customers this way. and can charge different rates to different borrowers for same facility. and benefit can be passed on to chosen ones. inspite of various complaints rbi has not looked into the application of floating rate in equitable and just manner. rbi itself changed prime lending rate to base rate. primelending is nothing but base rate + profit margin charged to the best customer asper parameters. when prime rate is in force banks used to charge for 70% of their advances less than primerate. but when base rate concept is intorduced some of the banks are keeping the differance between base rate and primerate is as high as 6 to 8%. why the rgulator cannot see this simple logic and take action these banks for overcharging the customers.