Here's how some banks leave borrowers high & dry after every RBI rate cut
ECONOMICTIMES.COM|
Updated: Oct 12, 2017, 12.49 PM IST
When the Reserve Bank of India (RBI) cuts lending rates, the cheer spreads all over instantly. People who have taken bank loans for homes or vehicles think the RBI has put some money back in their pockets. But that, often, is not the case. Even after the RBI rate cut, banks don't effectively transfer the cut to the borrowers.
The practice came to light recently when an RBI panel exposed the banks which "deviated in an ad hoc manner from the specified methodologies" that determine lending rates. The panel observed that internal benchmarks such as the base rate/marginal cost of lending rate (MCLR) had not delivered effective transmission of the monetary policy, which means RBI rate cuts are not being passed on to borrowers.
"We think that the internal benchmarks like the base rate or the MCLR, based on data, seem to give banks a very high amount of discretion lot of factors that are flexible for them to ensure that lending rates can be kept high even when monetary policy rates are going down an accommodative path," RBI deputy governor Viral Acharya said after the RBI panel's report was out.
Castigating such banks, the RBI said arbitrariness in calculating the base rate and MCLR and spreads charged over them had undermined the integrity of the interest-rate-setting process. The base rate and MCLR regime were also not in sync with global practices on pricing of bank loans.
Data from the RBI shows that, between December 2014 and October 2016, banks' base rate on an average reduced 0.61 percent when the policy rate was lowered by 1.75 percentage point.
Banks were also slow to pass on the reduction in their MCLRs in January 2017 to their actual lending rates, says the report. "Of the 12 banks whose spreads widened, six banks took up to six months to pass on the benefit of lower MCLRs to their lending rates; the remaining six banks passed on the benefit of their lower MCLRs, but only partially even after six months. This is intriguing as changes in MCLRs are expected to be passed on to at least fresh borrowers immediately," the report says.
Banks and the RBI have been at loggerheads for over a decade with the regulator publicly stating that banks move interest rate in such a way that it benefits them. Banks have been quick to raise interest rates when the RBI raised policy rates, but were slow to cut when RBI did so.
The previous RBI governor Raghuram Rajan introduced the MCLR to calculate the benchmark lending rate in another attempt to make banks pass on policy rate cut benefits to borrowers quickly and in a more transparent manner.
The practice came to light recently when an RBI panel exposed the banks which "deviated in an ad hoc manner from the specified methodologies" that determine lending rates. The panel observed that internal benchmarks such as the base rate/marginal cost of lending rate (MCLR) had not delivered effective transmission of the monetary policy, which means RBI rate cuts are not being passed on to borrowers.
"We think that the internal benchmarks like the base rate or the MCLR, based on data, seem to give banks a very high amount of discretion lot of factors that are flexible for them to ensure that lending rates can be kept high even when monetary policy rates are going down an accommodative path," RBI deputy governor Viral Acharya said after the RBI panel's report was out.
Castigating such banks, the RBI said arbitrariness in calculating the base rate and MCLR and spreads charged over them had undermined the integrity of the interest-rate-setting process. The base rate and MCLR regime were also not in sync with global practices on pricing of bank loans.
Data from the RBI shows that, between December 2014 and October 2016, banks' base rate on an average reduced 0.61 percent when the policy rate was lowered by 1.75 percentage point.
Banks were also slow to pass on the reduction in their MCLRs in January 2017 to their actual lending rates, says the report. "Of the 12 banks whose spreads widened, six banks took up to six months to pass on the benefit of lower MCLRs to their lending rates; the remaining six banks passed on the benefit of their lower MCLRs, but only partially even after six months. This is intriguing as changes in MCLRs are expected to be passed on to at least fresh borrowers immediately," the report says.
Banks and the RBI have been at loggerheads for over a decade with the regulator publicly stating that banks move interest rate in such a way that it benefits them. Banks have been quick to raise interest rates when the RBI raised policy rates, but were slow to cut when RBI did so.
The previous RBI governor Raghuram Rajan introduced the MCLR to calculate the benchmark lending rate in another attempt to make banks pass on policy rate cut benefits to borrowers quickly and in a more transparent manner.
