The Reserve Bank of India (RBI) on Thursday announced a new set of rules to calculate interest charges, a move aimed at prompting banks to fully pass on the central bank’s rate cuts to final consumers.
According to the new rules, effective from April 1 next year, banks will have to fix their “base rate”, the floor rate to which all lending rates are linked, on the “marginal cost” or the interest rate banks offer to new deposits.
This is different from the existing system where banks fix the base rate on the “average cost” that includes all existing borrowers.
The RBI has cut its key lending rate—the repo rate—by 1.25 percentage points since January. Ideally, the floating home loan rates should have come down by an identical margin. This hasn’t happened, with banks reducing their average lending rates by only 0.60 percentage points, frustrating both the RBI and millions of customers.
“Apart from helping to improve the transmission of policy rates into the lending rates of banks, these (new) measures are expected to improve transparency in the methodology followed by banks for determining interest rates,” the RBI said in a statement.
In the past, RBI governor Raghuram Rajan has been unsparing in his criticism about banks’ reluctance to cut rates in tandem with the central bank’s moves on interest rate reductions.
In April, Rajan had termed banks’ logic that cost of funds has not come down enough to reflect on their base rate as “nonsense”.
“The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks,” the RBI said.
Each month banks must also publish the benchmarks they use in setting their marginal cost of funds in order to improve transparency.
“SBI welcomes the final guidelines on marginal cost of funds methodology for interest rates on advances issued today by RBI. Sufficient time has been given to banks to switch over to the new regime,” State Bank of India (SBI) chairman Arundhati Bhattacharya said in a statement.