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.
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.
