RBI urges tougher line to get banks to pass on rate cuts

MUMBAI: A panel created by the Reserve Bank of India (RBI) has said lenders are not sticking to rules that determine how much they can charge for loans, and the sector must be compelled to re-assess lending rates.

The five-member panel, set up by the RBI to look into why lenders were not passing on central bank rate cuts, said in a report on Wednesday that banks "deviated in an ad hoc manner from the specified methodologies" for calculating the lending rates in order to avoid passing on the RBI rate cuts.

It suggested closer monitoring of how banks set their lending rates, while also suggesting a slew of technical changes intended to simplify the process of how banks go about determining how much to charge for loans.

Banks "could be advised to re-calculate the base rate immediately by removing/readjusting arbitrary and entirely discretionary components added to the formula," the RBI panel recommended.

If the RBI adopts the full proposals, it could mark a tougher line against banks that fail to pass on its rate cuts, though much would depend on how tough the central bank is willing to be in enforcing the rules.

The RBI last year unveiled the so-called marginal cost of funds-based lending rates (MCLR), which sought to remove much of the discretion the country's commercial banks have to set lending rates and force them to base borrowing costs on prevailing money market rates.

Banks were instructed to follow a specific formula in setting lending rates.

But to the frustration of RBI officials, banks have used the leeway provided by the RBI to lower lending rates by only about 120 basis points (bps) even though the RBI has cut its policy rate by 200 bps from January 2015 to August 2017.

The RBI solicited responses to the proposals presented by the panel by Oct. 25.