Kolkata: Within two days of RBI governor Raghuram Rajan suggesting the base rate calculation of banks on their marginal cost of funds, State Bank of India (SBI) chairperson Arundhati Bhattacharya has dubbed the existing draft rules on base rate calculation using marginal fund cost as “not workable”.
While giving its suggestions, like other peers, to the RBI, the chief of the country's largest bank also referred to the repo rate as a “blunt instrument” of the central bank which was not very relevant for lenders to adjust their rates.
The main argument against basing the base rate of banks on their marginal cost of funds is that Indian banks primarily depend on deposits and not on market borrowing for their funds. This essential difference creates a problem in adjusting the books as deposits are fixed in nature.
”In SBI, 97 per cent of our liabilities are deposits and with a change in the repo rate, it does not help in reduction in my cost of funds. In overseas banks, 30-40 per cent of their funds are market borrowings and so it is simple to extend the repo impact immediately,” Bhattacharya said at an event here on Thursday.
”Out of the total liabilities of banks, 40 per cent is CASA (current account savings account) where repo changes have no impact. Hence, adjustments has to be made only with 60 per cent of the funds,” she said.
The new base rate calculation formula is seen as a move aimed at ensuring that banks pass on policy rate cuts to borrowers at a pace lot quicker than at present, banking industry officials feel.
At the fifth bi-monthly monetary policy review on Tuesday this week, RBI governor Rajan had said that the apex bank would shortly issue guidelines to determine base rates on a new methodology based on the marginal cost of funds.
“What RBI (had) said on the methodology of base rate calculation initially was not workable. We have given our suggestions like many other banks,” Bhattacharya said.
Since the rate reduction cycle that started in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base-leÂnÂding rate has declined only by 60 bps, indicating downwaÂrd rigidity in lending rates.
The government is also examining linking small savings interest rates to market interest rates. Along with new base rate formula, these moves are expected to further help transmission of policy rates into lending rates.
At present, banks follow different methodologies for computing their base rate. Some use the average cost of funds method. Some others adopt the marginal cost of funds principle while there are still others who use the blended cost of funds method.
Analysts have said the new base rate formula will put pressure on the banks’ net interest margins (NIMs). Easing interest rates will be key to support a consumption-led growth pickup. For this to happen, transmission of the repo rate cuts to bank lending rates must improve, said Crisil.
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