RBI To Check Bank's Interest Rate And Spread

Loan pricing by banks comes under RBI lens

Base rate effectiveness under review due to lack of monetary transmission

Manojit Saha / Mumbai Jul 25, 2012, 00:24 IST Just two years after its launch, the base rate — the benchmark reference rate for all bank loans — has come under the Reserve Bank of India’s scanner as the regulator feels the methodology of rate fixation has hindered the transmission of monetary policy measures. The base rate, introduced in July 2010, replaced the benchmark prime lending rate and was aimed at increasing the transparency on pricing of loans and to improve transmission of monetary policy. According to central banking sources, apart from banks’ base rate methodology, the RBI will also look at the spreads that banks charge over the base rate for different loan products.  he effectiveness of the lending rate for policy rate transmission is tested the most when the rate cycle turns. HOW MUCH TRANSMISSION? Rate reduction by banks following the CRR cut of 75 bps and repo rate cut of 25 bps since Jan  Base rate (%) Reduced by (bps) New rate effective from State Bank of India 10 NIL - ICICI Bank 9.75 25 April 23 HDFC Bank 9.8 20 June 30 Punjab National Bank 9.5 25 May 1 Bank of Baroda 9.5 25 May 1 Canara Bank 9.5 25 May 1 Axis Bank 10 NIL - Bank of India 9.5 25 May 1 United Bank of India 9.45 15 April 23 Source: Banks The move comes after banks’ reluctance to cut rates despite the recent reduction in the cash reserve ratio (CRR) and the repo rate by the central bank. Since January, the CRR has been reduced by 125 bps and the key policy rate or the repo rate by 50 bps. Though some banks reduced their base rate by 10-25 bps following the RBI’s CRR and rate cut, the regulator feels the banks’ rate cut could have been more. “The base rate takes into account the cost of having CRR and SLR (statutory liquidity ratio). But following the CRR cut, a proportionate rate cut was not done by banks,” said a senior banker, who was in discussions with the RBI on the issue. Another contentious point raised by the regulator is the spreads. Some banks such as State Bank of India have changed their spreads, which has led to a reduction in the effective interest rate. However, the lower interest rate is offered to only the bank’s new customers.  The RBI, however, is of the view that ifthe spreads are changed, that should be applicable to both new and old customers. Banks have defended their action by saying spreads are a function of liquidity and the business strategy of individual banks and should not be seen as a transparency issue. “One bank, which is going slow on housing loans now, for example, may decide to go aggressive after a year and offer lower spreads. In that situation, it may not be practical to expect the bank to offer the same rate to existing customers,” said another banker. Bankers also said margins should be a call best taken by banks and the central bank should not dictate the margin a bank should levy. Banks have also come in the RBI’s firing line on deposit rates. The central bank has noted a significant variation in deposit rates on similar tenure and has been asking banks to correct the  anomaly.http://business-standard.com/india/news/loan-pricing-by-banks-comes-under-rbi-lens/481395/ SATURDAY, APRIL 28, 2012 Why not Uniform Interest Rate The war continues among banks on interest rate. After nationalization of banks in 1969, RBI used to decide rate structure for deposits and for lending uniformly applicable for all banks. But after adoption of reformation policy in the year 1991, RBI freed lending rates excepting loans upto Rs.2.00 lacs. In the name of competition, banks started rate war to attract high profile customers into their fold. Social banking concept and mass banking approach initiated through nationalization of banks have now become the history. Common men are now neglected for all practical purposes. High profile customers have now become the heroes and bankers now run behind these heroes. Profit making has become the sole priority. Priority and neglected sector of the society has became the last option for government banks as well as private banks so far as the growth in business is concerned.. Lending for farmers has slowly been transferred to NGOs and Micro Finance Institute who have gradually started lending at higher rates, even higher than local money lenders. It is also true that in the name of poor, banks open Financial Inclusion branches and only open No Frill accounts to give direct credit of various aids and subsidies to real beneficiaries. I am unable to understand how poor people will get satisfaction and fight with their poverty merely by having a bank account until their real regular income rises. http://danendrajain.blogspot.in/2012/04/why-not-uniform-interest-rate.html Stimulus Package For Rich But No Subsidy To Poor Reality of stimulus package is now visible; Fiscal deficit is increasing, trade deficit is increasing, current account deficit is increasing and GDP is coming down, IIP figure is coming down, rating of banks is coming down rating of country is at alarming position and so on ….Borrowing by government has been consistently increasing, public debt has reached to the level of 46 lac crores i.e. around 40% of GDP. Still government is allowing one after other subsidies to big corporate, exporters and importers.  http://blogs.siliconindia.com/danendra/NewIndia/Stimulus-Package-for-Rich-but-No-Subsidy-to-Poor-bid-ftw84JYC2611127.html