Page 52 - BANKING FINANCE November 2015 ONLINE
P. 52
FEATURE
Will new base
rate formula
help you?
D iwali seems to have come policy rates. It is likely to come into move are bound to arise. But
early for borrowers with force from April next year. industrywatchers are more confident
the RBI cutting rates by 50 about the new methodology's effec-
basis points and the Currently, banks compute their base tiveness, as it will be directly linked to
country's largest lender, rate on the basis of average cost of the interest paid by banks on various
the State Bank of IndiaBSE -0.30 %, funds, marginal cost of funds or deposits. "The anomaly in the existing
reciprocating with a 40 bps reduction blended cost of funds (liabilities). The base rate computation method will
in its base rate. RBI's objective is to ensure better reduce considerably if not eradicated
transparency that leads to more ef- completely. Under the new system we
However, the RBI has also announced fective transmission of policy rate cut will see frequent rate resets by
another 'gift' that could make a big- benefits to borrowers. "The proposed banks," says Patel.
ger impact on your EMIs. methodology would ensure that any
future repo rate cuts would be effec- The flipside
Festive present tively passed on to customers," says
Manavjeet Singh, Founder and CEO, While it is likely that rates will trend
The central bank will finalise its draft bestdealfinance.com. downward once the new formula
guidelines on the new methodology comes into force, you need to remem-
for computing base rates. All lending Advantage borrowers ber that it can cut both ways. You will
rates are pegged to the base rate, have to brace yourself for any prompt
the floor below which banks cannot The new formula, coupled with the uptick in interest rates too when
lend. It had circulated a proposal to recent rate cut, will leave more policy rates are hiked in future. Also,
link computation of base rate with money in borrowers' wallet. "The the greater transparency does not
banks' marginal cost of funding. So base rates of banks could soften a tad necessarily mean borrowers will have
far, banks were using varying method- and this could also reduce the lag be- a complete idea of the formula work-
ologies to arrive at their base rates. tween changes in the deposit rates ings and rationale behind changes.
and lending rates resulting in the
"Once RBI's proposal is finalised, higher benefits for the borrowers," "The consumers may still not be able
there will be uniformity and better says Singh of bestdealfinance.com. to (independently) compute the base
transmission of rate cuts to borrow- rate," says Patel. However, since the
ers," says Vipul Patel, Founder, However, given that regulatory inter- proposed formulae will be uniformly
MortgageWorld, a loan advisory firm. ventions, including introduction of the adopted by all banks and will be more
The banking regulator has pitched for current base rate system, by the RBI sensitive to policy measures, it is ex-
a base rate formula linked to mar- to ensure effective transmission have pected to bring in the desired result
ginal cost of funds, stating that it not met with great success in the of the central banks' policy measures
would be more sensitive to changes in past, concerns around the latest being transmitted to borrowers.
(Source : ToI)
52 | 2015 | NOVEMBER | BANKING FINANCE
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