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  1. RBI mulls changes in base rate calculation

RBI mulls changes in base rate calculation

Cost of funds, negative carry on CRR & SLR, average return on net worth to be taken into account

By: | Mumbai | Published: September 2, 2015 12:20 AM

To ensure effective transmission of its policy rate decisions by banks, the RBI has proposed a uniform method to banks for calculation of base rates on the basis of marginal cost of funds. Many banks currently take into account the average cost of funds or blended cost of funds to calculate their base rates, while a few have adopted this new method involving ‘marginal cost of funds.

“For monetary transmission to occur, lending rates have to be sensitive to the policy rate,” RBI said in draft guidelines on base rate calculation on Tuesday. As per the draft, components of base rate will include cost of funds, negative carry on cash reserve ratio/Statutory liquidity ratio, un-allocable overhead costs and average return on net worth. “The marginal cost of funds should be used for computing the cost of funds. The marginal cost should be arrived at by taking into consideration all sources of fund other than equity,” the draft norms said.

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Further, RBI said banks should calculate cost of deposits using the latest interest rate or card rate payable on current and savings deposits and term deposits of various maturities. “Cost of borrowings should be arrived at using the average rates at which funds were raised in the last one month preceding the date of review. Each of these rates should be weighted by the proportionate balance outstanding on the date of review,” it said.  RBI has proposed April 1, 2016, as the effective date to implement the guidelines.

The draft says the new method will help in the medium-term goal of banks pricing their floating rate loans linked to an external benchmark. Once Financial Benchmarks India starts publishing various indices of market interest rates, banks will be encouraged to price their deposits as well as advances with reference to the external benchmarks published the FBIL, it added. RBI has sought comments till September 15.

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  1. S
    S.Suchindranath
    Sep 2, 2015 at 10:43 am
    In a totalitarian "Animal Farm" India, bereft of competence, integrity and compeiveness in all walks of public life and where the Bureaucrats and Politicians have directed Bank finance towards their cronies and vote banks, it is a logical progression for the Central Bank to eradicate business compeiveness of Commercial Banks by setting their pricing mechanism. What surprises me is that the Indira hi-Sanjay hi-Rajiv hi protege, Mr. Janardhan Pujari has not yet been appointed as the Governor of the Reserve Bank of India. He would be better able to personally, and violently intimidate every Branch Manager in India with the help of Congress Party Goons to do Public Sector Banking as was intended by the 1969 Parliamentary Travesty. (In India, Parliamentary Travesties go by the Euphemism of Consution and Laws)
    Reply
    1. S
      S.Suchindranath
      Sep 2, 2015 at 10:44 am
      In a totalitarian "Animal Farm" India, bereft of competence, integrity and compeiveness in all walks of public life and where the Bureaucrats and Politicians have directed Bank finance towards their cronies and vote banks, it is a logical progression for the Central Bank to eradicate business compeiveness of Commercial Banks by setting their pricing mechanism. What surprises me is that the Indira hi-Sanjay hi-Rajiv hi protege, Mr. Janardhan Pujari has not yet been appointed as the Governor of the Reserve Bank of India. He would be better able to personally, and violently intimidate every Branch Manager in India with the help of Congress Party Goons to do Public Sector Banking as was intended by the 1969 Parliamentary Travesty. (In India, Parliamentary Travesties go by the Euphemism of Consution and Laws)
      Reply

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