Icra explained that if a reduction in a bank's deposit rate matches the repo rate cut by RBI, and the term deposits constitute only 60 per cent of the funding base, the transmission will only be 60 per cent of the rate cut.
Rating agency Icra has raised doubts on whether the Reserve Bank of India’s objective of quicker monetary policy transmission will be achieved by its new base rate computation methodology, but maintained the move will not impact the margins for lenders.
The guidelines issued by the apex bank last Thursday will “partly address” RBI’s concern of faster monetary policy transmission as complete dissemination would be linked to the extent of reduction in term deposit rates as well as the proportion of term deposits in the overall funding profile of banks,” the agency said in a report today.
The agency explained that if a reduction in a bank’s deposit rate matches the repo rate cut by RBI, and the term deposits constitute only 60 per cent of the funding base, the transmission will only be 60 per cent of the rate cut.
The report said there will not be a “significant negative impact” on the banks’ net interest margins as the marginal cost of funds-based lending rate (MCLR) will be applicable only for new borrowers.
In the draft guidelines, the RBI had suggested that the rate of interest will be changed for all borrowers. But the final norms make it mandatory only for new borrowers leaving the decision to include the existing ones to individual banks.
The central bank had issued guidelines for the computation of the benchmark lending rate using the marginal cost of funds method. Banks will have to implement the new system of loan pricing from April 1.
Apart from helping borrowers reap the benefit of lower rates, the step will improve transparency in the methodology followed by banks for determining loan pricing.
The Reserve Bank said, “the guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
“Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long run value and contribution to economic growth.”
The rating agency said the MCLR will benefit the new borrowers immediately as “we are in a declining interest rates scenario”, but warned that as rates start rising, the impact will be faster for them.
“Existing borrowers with floating-rate liabilities will bear the impact at a lag of up to one year. During the transition, it’s likely that some customers with relatively better credit profiles would want to switch from the base rate to MCLR, which in turn can improve policy transmission,” it said.