Tuesday, August 7, 2012

RBI wants banks to cut base rates, not select lending rates

Mumbai, August 6: With banks led by the country’s largest lender State Bank of India (SBI) choosing to cut spreads on certain categories of loans instead of the base rate, deputy governor Anand Sinha today said the Reserve Bank would like the banks to cut the minimum lending rate to better carry forward its monetary policy measures.

“The base rate is supposed to be responsive to the changes in monetary conditions Reserve Bank would definitely want the responses to be through the base rate,” Sinha said at an IDBI Bank event here. Sinha further said an RBI committee on interest rates, headed by him, is looking into these aspects.

The committee, supposed to come out with report last month, has made progress and will be submitting it soon. Replying to a question, Sinha said banks are unable to cut their base rates as per the monetary policy changes, because they carry the burden of fixed rate deposits and fixed costs to service that over a longer-time.

“Banks are not able to respond quickly to the changes in monetary conditions or monetary policy signals because they carry a fixed cost over an extended period of time,” he said, flagging this as a subject of discussion with bankers during deliberations on floating deposit rates.

On asked if the RBI which has been discussing floating rate deposits but also stressing fixed rate loans is concerned over potential asset liability mismatches, Sinha replied in the affirmative. “Asset liability concern, in the long-term, yes,” he said, adding that so far banks have been successful in managing the longer gestation infrastructure projects.

Though, since January, the RBI has cut repo rate by 50 bps and CRR by 125 bps, and a 100 bps SLR cut last week, the effect of the same has not been passed on to the customers by banks by lowering interest rates as a whole. Instead, banks have been cherry-picking interest rates reduction, and have not lowered their base rates, which would automatically lead to a similar reduction in interest rates for both existing as well as the new customers.

Some banks like State Bank and Union Bank of India, among others, have slashed interest rate on certain loan products like home loans and lending to SMEs, but have not cut the base rate, or the minimum rate of lending.

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