India’s largest bank by deposits, the State Bank of India (SBI) has reduced its base rate—an older lending benchmark—by 30 basis points (bps) to 8.65%. Theoretically, this reduction is expected to benefit borrowers who had taken floating rate loans before April 2016, when the base rate was replaced by the current benchmark—the marginal cost of lending rate (MCLR).
Reports in The Times of India and other publications unthinking parrot the line that with this cut, millions of borrowers, mainly home loan borrowers and small and medium enterprises, are expected to benefit. PK Gupta, managing director—retail and digital banking—of SBI claimed, "The reduction in base rate is a new year gift to the bank's loyal customers as a large number of consumers who have their loans linked to the base rate will be benefited. This reduction is part of the bank's efforts to ensure transmission of reduction in the policy rates in the recent past. Approximately 80 lakh customers will gain from this move."
Will they?
Only if SBI does not play a cat and mouse game with its borrowers.
They will benefit only if SBI starts unilaterally charging its customers the new lower rate. But if SBI sticks to the fine print and follows the practices banks have followed in the past, it will do the following: one, not intimate its borrowers that 30 bps cut has taken place; two, those who find out on their own and contact SBI, after reading articles like these, will be asked to come to the bank branches; three, charge them fees to change over which will cut into the benefit.
Banks are guilty of each of these practices -- and worse – in the past. Each time the interest rates rose, banks were quick to charge customers the new higher rate; when interest rates fell, banks have tried their best to deny the benefit to existing borrowers by multiple means. Until September last year, there was no way to prove this because banks refuse to share any data on this and Reserve Bank’s policy was to let banks do whatever they wanted to, even if it meant shortchanging customers.
But in late September last year, an internal study group of the Reserve Bank of India (RBI) submitted a report on how the floating interest regime worked. It came out with scandalous findings. Here is what it said of how the base rate worked in practice.
“The base rate system, with a link to the banks’ cost of funds, was expected to facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of the transmission of monetary policy. In practice, flexibility accorded to banks in the determination of cost of funds – average, marginal or blended cost – caused opacity in the determination of lending rates by banks and clouded an accurate assessment of the speed and strength of the transmission. Moreover, the discrimination in the pricing of credit between the new and old customers continued, as banks often adjusted the spread over the base rate to benefit the new borrowers.”
The fact is banks made no effort to guide small businesses and retail customers from the base rate system to the MCLR regime and from the higher interest rate to lower interest rate. Banks do not disseminate the switchover option through the branches of the banks or their websites or SMS and telephones. The has led the RBI Study Group to recommend:
“It should be made mandatory for banks to display prominently in each branch the base rate/MCLR (tenor-wise) and the weighted average lending rates on loans across sectors separately for loans linked to the base rate and the MCLR. The same information should also be hosted prominently on each bank’s website. The Reserve Bank could prescribe the format and the manner in which a minimum set of standardised data needs to be displayed in branches/hosted on banks’ websites. The Indian Banks’ Association (IBA), or any other agency considered appropriate by banks, could also disseminate bank-wise information on its website in the same manner in which each bank is required to disseminate information on its own website so as to facilitate easy comparison of lending rates across sectors and banks.”
Banks have preferred to play a cat and mouse game with the borrowers. Whoever found out on their own and came forward got a tiny bit of reduction. Those who did not continued to get charged by the higher rate, under the pretext that a loan is a contract and customers must come forward and discuss with banks if they want a change in terms. This legally correct position was really self-serving for banks because they could then continue to fleece customers with the old rate. Ask yourself, if 80 lakh customers of SBI are still on an older, higher rate, who has been benefiting?
