10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

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MONEY & BANKING

Economy & Nation

Banks use ad hoc and arbitrary methods to keep lending rates

in ated: RBI Study Group
Moneylife Digital Team
09 October 2017
    14 

Exposing the ad hoc manner used by banks to deviate from specified methodologies for
calculating base rate and marginal cost of funds based lending rate (MCLR), a Reserve
Bank of India (RBI) study group had said that banks used this to either inflate base rate
or prevent it from falling in line with the cost of funds. Also banks, both public sector and
private, took almost six months to transmit reduction in MCLR to customers, says the
report from an Internal Study Group of the RBI. 
 
The Study Group was set up on 24 July 2017 to study the various aspects of the MCLR
system from the perspective of improving the monetary transmission and exploring
linking of the bank lending rates directly to market determined benchmarks. "The ad hoc
adjustments used by banks, included inappropriate calculation of the cost of funds; no
change in the base rate even as the cost of deposits declined significantly; sharp increase
in the return on net worth out of tune with past track record or future prospects to offset
the impact of reduction in the cost of deposits on the lending rate; and inclusion of new
components in the base rate formula to adjust the rate to a desired level. The slow

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

transmission to the base rate loan portfolio was further accentuated by the long (annual)
reset periods," the Report says.
 

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

According to the Dr Janak Raj headed Study Group, the one year reset clause used by
banks impedes monetary transmission as pass through of monetary policy changes to
existing floating rate loans. The Study Group has recommended reducing the reset period
(for interest rates) to once in a quarter from once in a year on all floating rate loans,
retail as well as corporate. 
 
It says, "The transmission from the reduction in the MCLR to lending rates occurred with
a lag. In the case of private sector banks, it took almost six months for the transmission
from the lower MCLR to actual lending rates. However, in the case of public sector banks,
the transmission was not complete even after six months."
 

 
"In the absence of any sunset clause on the base rate, banks have been quite slow in
migrating their existing customers to the MCLR regime. Most of the base rate customers
are retail or small and medium enterprise (SME) borrowers. Hence, the banking sector’s
weak pass through to the base rate is turning out to be deleterious to the retail and SME
borrowers in an easy monetary cycle. To address this concern, besides immediate
recalculation of base rates, banks may be advised to allow existing borrowers to migrate
to the MCLR if they so choose to do without any conversion fee or any other charges for
switchover on mutually agreed terms. However, after the adoption of an external
benchmark from 1 April 2018 as recommended by the Study Group, banks may be

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

advised to migrate all existing benchmark prime lending rate (BPLR), base rate and
MCLR borrowers to the new benchmark without any conversion fee or any other charges
for switchover on mutually agreed terms within one year from the introduction of the
external benchmark, by end March 2019," the Report says.
 
As per the Report, transmission to interest rates on outstanding rupee loans was
significantly lower than on fresh rupee loans. It says, "The median spread in the case of
outstanding rupee loans remained significantly higher than that of fresh rupee loans,
reflecting the dominance of base rate loan portfolio in outstanding loans and lagged
interest rate reset (normally one year) for
the existing borrowers under the MCLR system. Spreads on outstanding loans were also
more volatile than those on fresh loans."
 
"Spreads charged by private sector banks on fresh rupee loans were consistently the
largest, followed by public sector banks and foreign banks. Spreads charged varied
significantly across banks and also temporally. Spreads of foreign banks were relatively
more volatile than those of public and private sector banks," the Report says.
 
According to the Dr Janak Raj Study Group, there are four factors affecting monetary
transmission. This includes, maturity mismatch and interest rate risk in the fixed rate
deposits but floating rate loan profile of banks; rigidity in saving deposit interest rates;
competition from other financial saving instruments; and deterioration in the health of
the banking sector.
 
A major factor that impeded transmission was the maturity profile of bank deposits, the
report says, adding, deposits with maturity of one year and above constituted 53% of
banks’ total deposits at end-March 2016, most of which were at fixed rates of interest. 
 
"Another source of weak transmission was rigidity in interest rates on banks’ saving
deposits, which remained notoriously stubborn even as the policy repo rate and interest
rates on term deposits moved in either direction. The third factor, which hindered
monetary transmission was the competition that banks faced from other saving
instruments. It appears that banks were reluctant to reduce interest rates sharply for fear
of losing deposits to other financial saving instruments such as mutual funds and small
saving schemes. Although bank deposits have some distinct advantages in the form of
stable returns (vis-à-vis mutual fund schemes) and liquidity (vis-à-vis small saving
schemes), bank deposits are in a disadvantageous position in terms of tax-adjusted
returns in comparison with these schemes. Banks, therefore, often appeared to be
reluctant to reduce interest rates on deposits in line with the reduction in the policy rate
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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

by the Reserve Bank. These factors imparted rigidity to the liability side of banks’ balance
sheet," it says. 
 
The Report says as per empirical analysis, the extent of responsiveness of interest
earnings and interest expenses to the changes in the policy repo rate is broadly the same,
making the net interest margins (NIMs) impervious to monetary policy changes. "The
deterioration in the health of banking sector and the expected loan losses in credit
portfolios induced large variability
in spreads in pricing of assets, severely impacting monetary transmission as banks’ NIMs
have remained broadly unchanged in the face of large stressed assets. Thus, rigidities on
the liability side such as longer-term maturity pattern of deposits with fixed interest
rates, along with the expected loan losses on the asset side, have been reflected in higher
pricing on the asset side, or lending rates," it added.  
 
The Study Group also recommends to make it mandatory for banks to display
prominently in each branch the base rate and MCLR (tenor-wise) and the weighted
average lending rates on loans across sectors separately for loans linked to the base rate
and the MCLR. The same information should also be hosted prominently on each bank’s
website. It suggest that RBI to prescribe format and manner in which a minimum set of
standardised data needs to be displayed in branches and hosted on banks’ websites.
 
The Study Group also observed that internal benchmarks such as the base rate and MCLR
have not delivered effective transmission of monetary policy. "Arbitrariness in calculating
the base rate and MCLR and spreads charged over them has undermined the integrity of
the interest rate setting process. The base rate and MCLR regime is also not in sync with
global practices on pricing of bank loans. The Study Group has, therefore, recommended
a switchover to an external benchmark in a time-bound manner," the Report says.
 
In July 2010, the RBI introduced base rate system to ensure that the banks do not lend
below a certain benchmark. However, from 1 April 2016, the base rate system was
replaced by MCLR that  comprises marginal cost of funds, negative carry because of cash
reserve ratio (CRR), operating costs, and tenor premium. Any change in key reference
rates such as the repo rate, brings about changes in the marginal cost of funds and affects
the MCLR. The MCLR prevailing on the date of first disbursement (whether partial or
full) remains applicable till the next reset date, irrespective of the changes in the
benchmark during the interim period.  

  

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

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COMMENTS

Sairam Maganty 35 minutes ago

Banks were Nationalised primarily to prevent exploitation by private nancial institutions. If Nationalised banks

start eecing, gouging and looting, there's no purpose and meaning to Nationalisation. Reserve Bank of India was

established to check and control banks from exploitation of public by fraudulent means and methods. Finance

Ministry is to over see these activities and control exploitation. Now, strangely all the three join hands in eecing,

gouging and looting current account and saving account customers in order to share wealth with big business

people , politicians.

 REPLY

Hari Panikker 52 minutes ago

It is an unacceptable loot. Post demonetization, the public sector banks are behaving like monsters. On the one

hand the PM is encouraging the people to use the banks for all transactions and the banks instead of supporting

and encouraging the call are exploiting the situation with unjusti ed levies on transactions and maintenance of

minimum balances. I am afraid that the FM is behaving like Shylock and is taking a pound of esh from every

average citizen under the guise of feeding the poor. The rich are made richer and the poor poorer. Time for Modi to

take a relook at the Finance Ministry and it's Minister. Mr Jaitley is certainly seen in poor light in his functioning as

the FM and Def Min. He is an avoidable baggage for well performing PM.

 REPLY

N B Ashok Rao 54 minutes ago

Apart from regular interest, they debit other charges such as Folio charge and Godown inspection charges on the

loan amounts. These are xed charges and if your loan is small and you add these to the interest, the rate of

interest will be much higher than what was promised at the time of lending. This is cheating, as these charges are

not told when taking loan.

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

 REPLY

Prabir Talapatra 1 hour ago

What is the remedy for those who are affected. Mostly banks do it intentionally to make money like greedy lender.

Strong punitive punishment must be enforced for all NPAs and responsible person /s personal property be freezed

and taken over by Government. No other way such corruptions can be stopped.

Government must install recording mechanism of all incoming calls to CMDs and other concerned of cials.

 REPLY

RAMEKWAL YADAV 3 hours ago

RBI should ensure that customers are not being looted by Banks.Guidelines should be issued to Banks on the basis

of studies by RBI.

 REPLY

samiullah shaik 5 hours ago

Sab mile hue hai ji, kya bank kya RBI

 REPLY

Gopalakrishnan T V 7 hours ago

The RBI introduced Bench Mark Prime Lending rate, the base rate and the Marginal Cost of Lending rate on an

experimental basis to make sure that the policy rate becomes sensitive and elastic to in uence the nal lending

rate to borrowers. But the banks acted smart and they took advantage of the experiments to reduce the interest

rate on deposits and failed to pass on the reduction in policy rates as they know that the RBI also cannot do much

to force the banks to change the lending rates and there is always a time lag to effect the changes if at all RBI

desired it and banks adopted. The RBI has a system of annual Inspection and generally at that time only RBI made

an attempt to see whether the banks have switched on to changes suggested by the RBI in the lending rates. Most

of the banks fail to understand the concept and have their own ways of arriving at the PLR, base rate and the MCL

R. and seldom the RBI attempts to verify the way the banks arrives at the lending rates. They satisfy the RBI by

making some announcements that they have changed the lending rates based on the policy rates and some

reduction here and there are effected to some of the borrowers who fall in the retail segments and generally well

rated borrowers by and large. But the reduction in Deposit rates gets effected fast and banks take the bene t to

retain their Net Interest Rate Margin (NIM) in tact which continues to remain very high and no one did bother to

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

question it though occasionally some Governor used to make a reference to it in their policy announcements

which gets ignored or not pursued vigorously either by the RBI or by the banks.

The banks cost of funds remain very high thanks to ever growing and ever greening non performing loans in their

books and RBI cannot literally arrive at the exact gure as banks have umpteen ways of hiding the bad debts and

the auditors and banks non professional Boards are hand in glove with each other to window dress the balance

sheet with the full knowledge of RBI. The write off of loans and addition to NPAS gets hidden and their cost has to

be necessarily recovered from banks stake holders who include share holders, depositors, good borrowers and

general customers and this practice has a blessing from the authorities including RBI. Objections sometimes come

from Money Life Foundation and some customers but they get ignored or seldom cared for as banks have no

alternative but to recover the losses on account of bad debts or the loss on account of passing of any reduction in

the lending rates due to change in policy rates.

It is really heartening to note that of late the RBI has come out with a new approach to link the banks lending rates

to external factors to make the policy changes effective and make them re ect in banks lending rates. But unless

RBI is very serious and is able to closely scrutinise the banks books and study the lending rates on an ongoing

basis, the banks will have their won methods and pressures to have special lending rates to the Corporates having

in uence on the Government, RBI Board, Banks own boards and greater say in the appointment and promotions

of banks top Executives.

 REPLY

J. P. Shah 11 hours ago

This is loot country, every one looting common mr

Every one is looting common Indian. Unless common men wakes up, such loot by politicians, govt servants,

industrialists, traders and service providers etc will continue loot.

 REPLY

Rohit Kashyap 12 hours ago

Thank you for pursuing. Can we not le with the Consumer Forum for the unfair practice and plea for return of the

excess charges back to the afffected consumers.

 REPLY

Avinash Khasge 13 hours ago

it is not good thing causing a burden

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

 REPLY

Prof. AG Iyer 13 hours ago

Sorry yo State SUCHETA ji, This is Nothing Short of Organized Loot by the "New Age SAHOOKARI (Read

Bankers)".......

 REPLY

Nelson Fernandes 13 hours ago

As I've been saying, Banks were once respected institutions, but now they are no better than pickpockets!

 REPLY

sohan modak 13 hours ago

So there is not much difference lef between banks and private lenders, except that banks control the economy

while private lenders control private lives !

 REPLY

Ramesh Poapt 14 hours ago

bank charges, MCLR..are 2 of the few ways to provide for bad loans..

 REPLY

Economy & Nation

NRI deposits growth in Kerala banks slows

IANS
05 October 2017
    0 

Though the total Non-Resident Indian (NRI) deposits in Kerala banks for the 12 month
period grew from Rs 1,42,668 crore in June 2016 to Rs 1,54,252 crore on June 2017, the
rate of growth fell from 22 per cent to eight per cent, data shows.
 
The figures were released on Thursday at the quarterly meeting of the State Level
Bankers Committee meeting held here.
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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

 
According to the figures, the total NRI deposits in the 6,339 branches of various
commercial, scheduled and private banks stood at Rs 1,17,349 crore in June 2015, and
grew to Rs 1,42,668 crore in June 2016 and to Rs 1,54,252 crore in June 2017.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as
sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not
responsible or liable for the same. As a source and news provider, IANS is responsible for
accuracy, completeness, suitability and validity of any information in this article.
 

  

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Economy & Nation

RBI's new directions for mobile wallets within a week

IANS
05 October 2017
    2 

The Reserve Bank of India (RBI) on Wednesday said it will issue a revised Master
Directions on Prepaid Payment Instruments (PPIs), such as mobile wallets, within a week
that will facilitate inter-operability into usage of PPIs.
 
"In line with the Vision for Payment and Settlement Systems in the country, the revised
framework will pave the way for bringing inter-operability into usage of PPIs.
 
"Inter-operability amongst KYC-compliant PPIs shall be implemented within six months of
the date of issuance of the revised Master Directions, which will be issued within a week,
i.e., by October 11, 2017," the apex bank said in a statement.
 

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

The RBI had issued guidelines for issuance and operations of PPIs in April 2009 in order
to foster an orderly development of the PPI ecosystem.
 
In the light of the experience gained, a draft of Master Directions was placed in March in
the public domain for comments.
 
"The feedback received has been examined and it has been decided to rationalise the
operational guidelines with a view to encouraging competition and innovation, and
strengthening safety and security of operations, besides improving customer grievance
redressal mechanisms," the statement said.
 
The RBI on Wednesday also issued regulations for the peer-to-peer (P2P) lending
platform as a non-banking finance company (NBFC).
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as
sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not
responsible or liable for the same. As a source and news provider, IANS is responsible for
accuracy, completeness, suitability and validity of any information in this article.

  

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COMMENTS

Kunwar Vachher 2 hours ago

What is new govt. doing ? Nothing ?

 REPLY

Avinash Khasge 13 hours ago

this is operational guidance to the wallet users

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10/10/2017 Banks use ad hoc and arbitrary methods to keep lending rates inflated: RBI Study Group

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