The Reserve Bank's new uniform methodology for calculating base rate on marginal cost of funds is 'credit positive' for Indian banks as it would ease pressure on their balance sheet, Moody's said.
The Reserve Bank’s new uniform methodology for calculating base rate on marginal cost of funds is ‘credit positive’ for Indian banks as it would ease pressure on their balance sheet, Moody’s said.
“The new guidelines will reduce pressure on the banks’ net interest margins (NIMs), a credit positive,” Moody’s Investors Service said in a statement.
To improve transparency and ensure speedier monetary policy transmission, RBI last week said that from next April, all banks will have to follow a new uniform methodology for calculation of base rate on the basis of the marginal cost of funds.
As per the guidelines, banks will fix their lending rates as per their marginal cost of funding every month, which will be based on the rate offered on new deposits.
Under the current system, banks fix their lending rates based on the average rate of outstanding deposits.
“The new calculation methodology applies only to new loans after April 1, 2016, instead of all existing loans and banks will have a tenor-based benchmark instead of a single base rate,” Moody’s said.
It said this would allow banks to more efficiently price loans at different tenors based on different Marginal Cost of Funds based Lending Rate (MCLR), according to their funding composition and strategies.
“Existing loans will continue to be priced off of a base rate until they are repaid or renewed, giving banks ample time to transition to the new methodology without affecting their NIMs,” Moody’s added.
Indian banks currently set their base rates on either their average cost of funds, or marginal cost of funds.
“However, because the marginal cost of funds would result in a lower cost of funds amid declining policy rates, banks have not used it,” it added.
RBI has so far this year lowered policy rates by 1.25 per cent while banks have reduced their base rates by much less.
For new loans approved from April, banks will also be allowed to specify interest reset dates, which are linked either to the date of loan approval or the date of MCLR review.
“The interval between rate resets can be up to one year. This provides an additional layer of flexibility for banks to align their overall portfolio lending rates to their overall portfolio deposit costs,” Moody’s added.