RBI to bring new norms for arriving at lending rates by banks

MUMBAI: The Reserve Bank of India (RBI) is set to crack the whip on banks to ensure they pass benefits of lower interest rates to customers rather than giving excuses to hold on to higher lending rates. It will come up with a new version of the formula to compute lending rates, also called the marginal cost of lending rate or MCLR.

Governor Raghuram Rajan expressed disappointment that banks have cut rates only modestly despite ample liquidity in the system. Since January 2015, RBI has cut policy rates by 150 basis points while banks have reduced lending rates by just 80 basis points.

“Despite easy liquidity, banks have passed past rate cuts into lending rates only modestly. Earlier, some bankers said that it was the lack of liquidity that was holding rates high, now I hear from some that it is the fear of the FCNR (B) redemptions that is making them reluctant to cut rates,” said Rajan.

“I have a suspicion that some new concern will crop up once the FCNR (B) redemptions are behind us.” He said that RBI would suggest some revision in the MCLR formula. India is expected to see $26 billion outflow on redemption of FCNR (B) deposits in September. Some bankers do not agree with Rajan.

“MCLR formula is binding hands of banks, ultimately competition should be driving the rates. Just as there is flexibility on how banks can price their deposit rates, banks should be given flexibility in pricing lending rates as well,” said PK Gupta, managing director of State Bank of India. SBI, India’s biggest bank, offers lower MCLR rate of 9.15% for one year.

Rajan pointed out that lending rates could fall if credit demand from corporates rise and banks clean up their books. Demand for loans has been weak as a number of large manufacturing units are operating below optimal capacity and due to the absence of large corporate investments. Banks are not actively pursuing new loans as they focus on recovery of bad debts, which is eating into their earnings.

Credits ET Realty

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