Currently, only two private banks have on offer repo-rate linked retail loans. After RBI notification, all other private lenders will have to fall in line
By Shritama Bose & Mitali Salian
Private banks are unhappy with the Reserve Bank of India’s diktat to link floating rate loans given to individuals and small enterprises to an external benchmark. Currently, only two private banks have on offer repo-rate linked retail loans, but after this week’s notification all other private lenders will also have to fall in line.
The one-size-fits-all approach does not account for the varying liability profiles of different players, some bankers told FE.
Indeed, the rule effectively suits public-sector banks (PSBs) alone, one executive said. “They (RBI) have certainly thought through this from the perspective of public-sector banks. They are under pressure because of poor transmission,” he said.
Meanwhile, the underlying problem of tight liquidity has not been fully solved and this keeps the cost of funds relatively high for private banks. Given their parentage, even the weakest of PSBs are able to hold on to their low-cost current account savings account (CASA) deposits.
Another anomaly is that the same borrower with the same credit profile could be charged different spreads by different banks, based on their respective cost of funds. As the external benchmark underlying the lending rate will not account for the bank’s cost of funds, the lender will tend to price that metric into the spread.
The three-month reset clause could well be another pain point for both customers and lenders. “When I give the loan, linked to whichever external benchmark, my cost of funds could be one thing and may not be the same going ahead. And yet, I am stuck with the same spread,” the person quoted above said.
The circular may not get implemented because the banking system’s liability side is not equipped to handle such a structural transformation, Macquarie said in a report dated September 4. “Banks in India are essentially deposit-funded, and deposits in India are fixed-rate in nature. Even the AT-1 bonds and Tier-2 bonds, which constitute the remainder, are fixed rate in nature. So to expect banks to borrow fixed and lend floating rate, especially at rates linked to an external benchmark, may not be practical,” the report said.
Some bankers, however, differ with this assessment and expect the loan as well as deposit markets in India turning more market-linked with the implementation of the new norm. Ashutosh Khajuria, executive director and CFO, Federal Bank, said that all the central bank wants is that if a loan has a floating rate, it should be based on a transparent and uniform benchmark across banks rather than their liabilities profile.
“Why should a customer pay for the inefficiency or weakness of a particular bank? If one bank is able to get deposits only at a higher rate, why should customers pay a higher rate of interest on loans? That is the principle behind it,” he said.
Further, banks will also have the freedom to lend at fixed rates in the same categories and the customers will be able to pick and choose whichever kind of rate suits them better. The same may eventually be true for deposits as well, Khajuria said. He also brushed aside concerns around a squeeze in banks’ interest margins, saying that such phenomena are a given each time the system migrates to a new pricing paradigm.
While people should be prepared for initial glitches in implementation and variations in interpretation after October 1, they should not be seen as a result of flaws in the circular itself.