Mumbai: The Reserve Bank of India (RBI) must allow deposit rates to be linked to an external benchmark if it wants to apply such a benchmark for loan rates so as to prevent asset-liability mismatches, said bankers. However, depositors’ acceptance for floating rate products may not come easy.
“It cannot be one-sided,” said Rajnish Kumar, managing director of State Bank of India (SBI). “Any change in the methodology would mean that the pricing of loan and liability product will have to move in tandem. Today, to reduce interest rate, without reducing deposit rate is not possible. And to reduce deposit rate, I have to take care of my depositors. This is a delicate balancing act which the bank does.”
Kumar has been appointed as the bank’s chairman.
A committee set up by central bank has recommended linking bank lending rates to a market benchmark in a bid to hasten monetary policy transmission as well improve transparency in rate setting by lenders.
The panel—headed by Janak Raj, principal adviser, monetary policy department—recommended that all floating rate loans advanced from April be referenced to one of three external benchmarks. The panel has suggested a risk-free curve involving rates on treasury bills, or certificate of deposits rates or the central bank’s policy repo rate.
The panel has also recommended that banks may accept deposits, especially bulk deposits, at floating rates linked directly to one of the three external benchmarks. The decision on the spread over the external benchmark should be left to the commercial judgment of banks, the panel recommended.
However, bankers said that while such floating rate deposit would be easy in case of bulk deposits, usually those above Rs1 crore, for retail deposits, especially those maturing in one to three years, customers may not be willing to accept because of quarterly resets.
The panel suggested that lending rates should be reset once every quarter, from the current practice of once a year.
According to Ashutosh Khajuria, executive director at Federal Bank, there is a need for a gradual approach to convert to the new regime because compared to global trends, loans in Indian banking system are mainly funded by deposits and not through market borrowing.
“A large part of bank deposits is on fixed rate. Even with CASA (current account and savings account) deposits, savings accounts are on fixed rate. For this to change to floating rate, a gradual approach (is needed) because this calls for changing the balance sheet profile of banks, which cannot be done overnight or even in six months,” he said.
The panel’s recommendation to migrate all existing borrowers to a new regime without any conversion fee or other charges within one year of its introduction, i.e. March 2019, has also kept bankers worried.
“There will be impact on net interest margin because while marginal cost of funds-linked lending rates have fallen sharply, base rates are still on the higher side,” said a senior banker with a large Mumbai-based bank requesting anonymity.
According to Udit Kariwala, senior analyst at India Ratings, assuming that retail depositors will accept floating deposits looks stretched as RBI would not want the saver class to be exposed to interest rate risk.
“Also, as proportion of floating rate loans linked to MCLR rate increased, banks have faced pressure on profitability more so as the credit offtake remains weak. The spread between MCLR and base rate is substantial giving some cushion on margins. To protect margins, banks then went for savings rate reduction. Now with external benchmarking, the acceleration of margin reduction will only go up,” he said.
RBI will take a final view on suggestions of the panel after taking into account public feedback received until 25 October.