RBI, banks not on the same page on base rate calculation

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Mumbai | Updated: April 8, 2015 1:50:16 PM

Faced with tardy transmission of policy rate cuts, the Reserve Bank of India has now proposed that banks adopt a marginal...

RBI, RBI rate cut, RBI interest rate cut, RBI repo rate, Raghuram Rajan, Raghuram Rajan rate cut, RBI monetary policy, Narendra Modi, India inc, Business news, Indian economy, Economy news, hdfc, sbi, banking newsThe RBI slashed its repo rate twice between January and March by a cumulative 50 bps, which was not followed by base rate cuts by banks until now. (PTI)

Faced with tardy transmission of policy rate cuts, the Reserve Bank of India has now proposed that banks adopt a marginal cost-of-funds approach in calculating base rates, hoping that this would nudge banks to respond quickly by paring base rates.

The move, however, has not pleased bankers, who said this approach could infuse volatility in loan pricing and, in fact, raise the base rates in some cases.

The RBI, in its first bi-monthly policy for 2015-16 on Tuesday, said it would issue detailed guidelines for banks to adopt marginal cost-of-funds approach in determining their base rates. Currently, it is left to the banks to calculate their base rates and most banks use average cost of funds.
Pradeep Kumar, the managing director at State Bank of India, the country’s largest lender, said base rates could go up if the marginal cost-of-funds approach was adopted. “I strongly believe we should go with the average cost of funds, but we will look at the numbers. When we looked at the guidelines, our base rates were going up rather than coming down. This will introduce more volatility,” he said. Nevertheless, SBI slashed its base rate by 15 bps to 9.85% citing fall in cost of funds from earlier cuts in deposit rates.

The RBI slashed its repo rate twice between January and March by a cumulative 50 bps, which was not followed by base rate cuts by banks until now. Bankers had said that the RBI’s guidelines on calculating the base rate prevented them from paring lending rates. Governor Raghuram Rajan on Tuesday rubbished banks’ claim that cost of funds had not come down and said that lenders must respond with rate cuts. “I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said.

Base-rate

SBI and HDFC Bank’s move to slash rates on Tuesday indicated that banks are finally seeing a fall in cost of funds and passing on the same to borrowers.

Rajan said base rate calculations using the average cost-of-funds method had slowed the transmission process. Under the average cost of funds based calculation, banks take an average of the rates on various tenures of deposits (referring to a formula by the RBI) and add to it their profit margin and overheads to arrive at their base rate. Bankers now await the guidelines which would give clarity on the formula to be used in case of marginal cost of funds method. “We need to see over what period the marginal cost of funds has to be calculated,” said K Subramanyam, executive director, Union Bank of India.

“There is a concern that base rate may increase. But we have also done some calculations on marginal cost-of-funds for the previous quarter and, in that senario, the base rate rises. But we will look at our numbers again,” said Ranjan Dhawan, MD & CEO of Bank of Baroda.

Whether the change in the method of base rate calculation will expedite loan rate cuts remains to be seen. But for now, banks are willing to pass on the benefits on cost of funds to borrowers.

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