The Reserve Bank of India (RBI) on Wednesday flagged the issue of poor transmission of past rate reductions through marginal cost of funds-based lending rates (MCLRs) at banks and said it will undertake a review of the framework, including the possibility of linking bank lending rates “directly to market determined benchmarks”.The central bank said since a large chunk of floating-rate loans in the system continue to be linked to base rates, it will also explore options to make the base rate more responsive to changes in banks’ cost of funds.
“The experience with the MCLR system introduced in April 2016 for improving the monetary transmission has not been entirely satisfactory, even though it has been an advance over the base rate system,” the RBI said in a press release. It has set up an internal study group to study various aspects of the MCLR system in order to improve the monetary transmission. The group will submit its report by September 24. The RBI pointed out that banks’ base rates have moved significantly less than their MCLRs. “While the extent of change in base rate may not necessarily mirror the revision in the MCLR, the rigidity of base rate is a matter of concern for an efficient transmission of monetary policy to the real economy,” the central bank observed.
State Bank of India (SBI), the country’s largest lender, reduced its one-year MCLR by 120 basis points (bps) between April 2016 and January 2017 to 8%. Its base rate has fallen by a mere 30 bps between April 2016 and August 2017 to 9% — a full percentage point higher than the one-year MCLR.
B Sriram, managing director, SBI (corporate banking group), observed linking lending rates to market benchmarks may be tricky because while most liabilities at Indian banks are deposits which are fixed-rate, assets have a floating rate. “So, in some way, banks will have to reposition and structure their balance sheets with both sides geared similarly as we go ahead or we could see if this MCLR could be linked to market rates, whether it will really be feasible in the current context,” he added.
Banks have also been slow to migrate borrowers with loans taken before April 2016 to the MCLR regime. As on March 31, SBI had 50% of its loan book linked to the MCLR, up from 40% at the end of December. Last month, HDFC Bank had said the portion of its book which was yet to move from base rate to MCLR is about 5-6%. ICICI Bank said more than 50% of its floating-rate book is linked to MCLR. After SBI’s financial results for FY17, chief financial officer Anshula Kant had said, “Typically, in the fourth quarter, a lot of review/renewals happen, at which time, many loans have moved from base rate to MCLR. So, it has jumped by 10% in one quarter.”