Page 35 - Banking Finance December 2019

ARTICLE

v. The RBI should issue a circular/master direction asking iv. Competition, rather than diktat from the RBI, should
banks and financial institutions to allow existing set lending rates of banks.
borrowers to migrate to MCLR or any new system v. RBI must stop micro-managing how banks should set
without any conversion fee or other charge for the their lending rates.
switchover. Special helplines may be required to
facilitate this conversion. vi. Pegging interest rates to external benchmarks is the
way forward and that it must apply to both liabilities
vi. Banks have made half-hearted attempts to educate and assets for the transmission to work effectively.
customers on the switchover from base rate or BPLR
vii. With the adoption of an external benchmark, there
to MCLR and on the many complex nuances under the
will be more transparency, uniformity and comparability
new MCLR structure.
in loan pricing for customers and transmission will
vii. Developed markets typically have two benchmark rates
improve.
- one for retail loans and another for corporate loans.
For instance, in the US, the prime rate - normally 3 Some Reflections on the Feedback
percentage points higher than the Federal Funds Rate
- is the benchmark rate for consumer and retail loans, Received

and London Inter-bank Offered Rate (LIBOR) is the Banks have suggested persisting with MCLR, an internal
reference point for corporate loans. Similarly, in the UK, benchmark based on marginal deposit funding cost. While
the Bank of England's base rate is a key benchmark rate an internal benchmark such as MCLR (or any other
for consumer and retail loans, while LIBOR is the equivalent based on deposit funding cost) seems attractive
benchmark for commercial loans. from the standpoint of banks, it suffers from a fundamental
flaw in that it makes banks insensitive to policy rate changes.
Comments received through print media - press Put simply, banks face no urgency to adjust their deposit
reports/press articles in particular - covered a broad rates in response to policy rate changes.
canvas as mentioned below:
i. The Indian banking model is different from western And as long as banks do not change deposit interest rates,
models in terms of dependence on wholesale funding. that would continue to stifle transmission to their lending

ii. Signals from monetary policy are only indicative and not rates. Saving deposit interest rates by banks are not
like traffic signals. changed for six years from October 2011 to July 2017 even
as monetary policy cycles changed in either direction. It is
iii. The global best practice is that banks' liabilities are the
all the more intriguing as banks were vehemently opposed
ultimate deciding factor for pricing their assets, not any to deregulation of saving deposit interest rates on the
single external benchmark.
ground that it would lead to a rate war amongst banks.

Action taken by the bank
In 2005, ING Vyasa Bank had linked home loan rate with
Mumbai Interbank Offer Rate.

In March 2018, Citibank linked its home loan rate with three-
month Government of India T-bill benchmark. The data is
based on Financial Benchmarks India Pvt Ltd.

In December 2018 policy, the RBI proposed that all retail
loans, including floating rate loans to Micro and Small
Enterprises, extended from April 2019, shall be benchmarked
to either the RBI repo rate, or any other external benchmark
produced by the Financial Benchmarks India Ltd (FBIL).

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