Monday, 2 February 2015

RBI advises banks to review base rate quarterly

Rakesh is a salaried individual who is looking forward to a personal loan. Though he has his documents ready, he is waiting for a rate cut so that he can borrow at a cheaper rate of interest. He keeps on checking the bank’s website to see if the interest rates have been revised after RBI announced a rate cut. But two weeks after, he is still waiting to see any change in the bank’s rates.
For many borrowers like Rakesh, life got a little easier with RBI directing quarterly review of rate cuts at banks’ end.

Reserve Bank of India
The Reserve Bank of India (RBI) on January 19 said banks must review their base rate, or the minimum rate at which they lend, every quarter.



The Central Bank cut the repo rate by 0.25 percentage basis points, the first reduction in one and half years, to boost credit and economic growth. The new base rate norms come into effect from February 19.

This is supposed to benefit borrowers as banks would now have to pass on lower rates from RBI in shortest possible time. Earlier, banks reviewed their base rates from time to time but there was no set guideline for quarterly review of base rate.

Analysts feel that RBI could further reduce repo rate by 100 bps this year and banks could lower interest rates as the credit demand remains weak. Only two banks have announced rate cuts since the RBI announcement.

In another move, the RBI has allowed the banks flexibility to revise their methodology for calculating their base rate. The methodology may be revised every three years now instead of five years earlier. While allowing flexibility, the Central Bank has also said their methodology must be transparent and available for scrutiny.

The RBI circular also said the "banks’ change in tenor premium should not be loan class or borrower specific." Anything banks levy over the base rate is known as tenor premium. For example, if the base rate of a bank is 9 per cent and premium is 0.50 per cent for a 15-year borrowing period, then the applicable rate for customers would be 9.50 per cent.

The rate at which banks source their funds must be taken into account, but RBI said deposits which form the majority of their funds should form the rate at which they lend. It also directed that while banks are free to choose whatever method they adhere to, proper disclosure and scrutiny procedures must be followed.

The bank’s internal policy must justify the rationale behind and range for the spread in any particular category of borrower, the RBI advisory said.
These changes are supposed to reduce the lag between RBI policy and its implementation and ease the supply of funds to eligible borrowers. Banks would now have to declare cuts in base rate soon after the RBI announcement. This would promote transparency.

RBI’s move has brought cheer among small borrowers and SMBs who are dependent on bank credit to grow their business.

13 comments:

  1. Thanks for such very great information. This is the best sites for proving such kinds of good information.
    Examhelpline

    ReplyDelete
  2. it's good to be here and read some interesting posts , i got very useful information over here thanks for sharing it .
    UPTET Answer key

    ReplyDelete
  3. Really this is very great information sharing with us. Thanks lot.Examhelpline.in

    ReplyDelete
  4. Thanks for such very great information. This is the best sites for proving such kinds of good information. CBSE UGC NET Answer Key

    ReplyDelete
  5. Such very good information...Thank you for your sites for proving such kinds of good information.
    MBOSE HSSLC Time Table 2017

    ReplyDelete
  6. Really this is very good detail sharing with us. Thanks lot. Manipur 10th Board HSLC Date Sheet 2017

    ReplyDelete
  7. it's good to be here and read some interesting posts.. thanks for sharing it . .. Most Expensive Armored Cars Used By VIPs

    ReplyDelete