Bankers are meeting Reserve Bank of India (RBI) officials on Monday to take stock of the rate and liquidity scenario, and to press for extension of the maximum period to review methodologies for fixing base rate from six months to one year.
The meeting, which comes ahead of the central bank?s first quarter review of credit and monetary policy, would also discuss the issues of credit offtake and low deposit mobilisation by the banks. Most banks see an upward bias in interest rates owing to inflationary tendencies in the economy.
The bankers, drawn from across the segments ? public, private and foreign ? would also discuss with the central bank top brass how to manage their existing retail borrowers who had opted for fixed rate of interest in the base rate system.
According to MD Mallya, CMD, Bank of Baroda, ?Yes, we had demanded an extension of the deadline for reviewing the methodology of the base rate to one year from six months at present.? The idea is to have flexibility when banks finally arrive at the base rate methodologies, he added.
Indian Banks? Association (IBA) chief executive K Ramakrishnan also said the six-month period was too short a time for finalising the base rate methodology as there were a lot of options given by RBI and it would take at least one year for the banks to find out the most viable basis for calculation of the base rate.
State Bank of India chairman OP Bhatt has already said RBI could come out with some kind of sunset clause by which central bank would apply its constitutional power to shift all such existing loans to the base rate system.
According to Canara Bank chairman & managing director AC Mahajan, stabilisation of the base rate was a very important thing which has happened in the banking industry. ?Now, when there is a talk of putting a cap of maximum lending rates, it should not be more than 6.5% to 7% in addition to the existing base rate.?? Mahajan added there would be some hints of increase in key policy rates by RBI during the meet.
Explaining the balancing act the RBI needs to do, Mahajan said it was very important to contain inflationary expectation and ensure credit supply across sectors. However, in case RBI kept on increasing key policy rates and if banks were not able to increase rates in that proportion, their profitability would start decreasing, he pointed out, adding this would not help bring down inflation. Also, it will discourage the banks to increase their credit offtake. ?I believe that service providers must have money to meet their credit demands,?? he said.
Union Bank of India CMD MV Nair also saw an upward bias in policy rates until the inflationary expectations are brought under control. ?Again, the timing for the revision in policy rates is purely up to RBI. However, I don?t see any change in the cash reserve ratio (CRR),?? he said.
?Earlier, we had hoped that liquidity would be reasonable into the system until September. Thing will be more clear after September as the government expenditure will start by that time,?? he observed.
IDBI Bank CMD RM Malla too thinks inflation is an issue. ?Though quite a few measures have already been taken by RBI to contain it, I don?t see very radical changes in the interest rates in the short term. But, there is an upward bias on rates in the medium term, though not in a significant way. Shortly, all the banks are likely to announce their maximum lending rates,?? he said. RBI had said banks were free to use any other methodology to arrive at base rate as considered appropriate, provided it was consistent and made available for supervisory review as and when required. In order to give banks some time to stabilise the system of base rate calculation, the central bank had allowed banks to change the benchmark and methodology any time during the initial six month period, ie December end 2010.