Unhappy with MCLR, RBI may link rates to market determined benchmarks

RBI Deputy Governor Viral Acharya, however, said the incremental benefit from the marginal cost of funds based lending rates (MCLR), introduced in April 2016 as an alternative to the earlier system of base rate, was positive. Even after the introduction of the MCLR and several rate cuts, the RBI has been repeatedly complaining about banks not doing enough to pass on the full benefit of its rate actions to the borrowers and help revive the sagging private investment for economic growth.

Patel said banks have been selective in their rate cuts in aggressive segments like home and auto loans, but there are many other segments, especially those, where borrowers are still tied to the base rate, where they can do more. “Given the liquidity conditions prevailing and that we have reduced policy rates by substantial amount since start of easing cycle, I think there is scope for banks to reduce lending rate for those segments. So far, they have not benefited to the full extent of our policy rate cuts.”

The RBI said a quick scrutiny of the Base Rate of some banks post the introduction of MCLR suggests that it has moved significantly less than MCLR. “While the extent of change in Base Rate may not necessarily mirror the revision in MCLR, the rigidity of Base Rate is a matter of concern for an efficient transmission of monetary policy to the real economy. Given a large part of the floating rate loan portfolio of banks is still anchored on the Base Rate, the RBI will be exploring various options in the near future to make the Base Rate more responsive to changes in cost of funds of banks,” the RBI said.

Acharya said the ongoing resolutions on the NPA front will also help in better transmission as the banks’ balance sheet stress is resolved. He also announced that the Reserve Bank will be coming out with final guidelines on tripartite repo to deepen the corporate bond market, which, by working as an alternative to the bank lending, will also force banks to tinker with the rates quickly. The RBI announced that it is forming a high level task-force to help develop a “comprehensive near real-time public credit registry,” which will evaluate the existing public and private infrastructure for credit information, assess any data gaps, study the best international practices and provide a roadmap. “The objective is to improve not just the credit assessment by financial lenders, but also of the financial lenders themselves,” Acharya said.

“A public credit registry can potentially help banks in credit assessment and pricing of credit as well as in making risk-based, dynamic and countercyclical provisioning,” the RBI said. “The PCR can also help the RBI in understanding if transmission of monetary policy is working, and if not, where are the bottlenecks. Further, it can help supervisors, regulators and banks in early intervention and effective restructuring of stressed bank credits,” it said.