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RBI puts pressure on banks to lower lending rates

Mumbai: The Reserve Bank of India (RBI) proposed on Tuesday that banks should decide lending rates based on their marginal cost of funding, hoping the shift will persuade them to lower lending rates faster in response to central bank easing measures.

  RBI puts pressure on banks to lower lending rates

The RBI logo. Reuters

The RBI kept its key policy rate on hold at 7.5 percent on Tuesday, but is disappointed that after two rates cuts earlier this year just four of 45 Indian banks have lowered their lending rates.

Their reluctance to lower rates for borrowers has raised concerns about the limited impact the looser monetary policy is having on the broader economy.

To help the effect of policy changes be felt faster in the economy, the Reserve Bank will encourage banks to move in a time-bound manner to set base rates based on their marginal cost of funds, the central bank said in its monetary policy statement on Tuesday.

Detailed guidelines would be released soon, it added. The prospect will be a shock for commercial banks, which have enjoyed a large degree of freedom in setting lending rates, currently ranging between 10 percent to 11.25 percent.

While the RBI wants its looser monetary policy to boost economic growth, latest banking data shows loan growth at multi-year lows, with 9.5 percent growth in the two weeks to 20 March from a year earlier.

Banks have cited lack of liquidity, weak credit demand, and sticky cost of funds as reasons for their reluctance to reduce lending rates.

Part of the reason is also a lack of borrowing by companies whose projects remain stalled, despite signs that the economy is growing faster after two straight years of sluggish expansion.

But there are expectations that lending rates will come down.

"There is competition building up from the markets... banks will over time be forced to match the market, and will have to bring down rates," RBI Governor Raghuram Rajan told a news conference after the policy review.

Banks have started cutting deposit rates, and bankers say lending rates are generally on a downward trend, but most are still noncommittal on the timing and size.

A senior executive at State Bank of India, the country's biggest lender, feared a switch to using the marginal cost of funds to determine base lending rates would lead to frequent changes in the rates. He recommended using the average cost of funds instead.

"Based on the marginal cost of funding I have to change the base rate, which means 80-85 percent of my advances is going to be changed on the basis of marginal cost of funding which is maybe 1 percent of my deposit," said P Pradeep Kumar, a managing director at SBI.

Reuters

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Updated Date: Apr 07, 2015 17:33:56 IST

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