Terming the repo rate as a “blunt” tool for determining the base rate of commercial banks, State Bank of India chairman Arundhati Bhattacharya on Thursday said the proposed changes in the process of determining base rates of banks based on marginal cost pricing may not work.
The head of the largest lender of the country pointed out that banks need to have a better balance between liabilities and assets for faster monetary transmission.
“It becomes difficult to cut rates for banks when repo rate comes down as banks are not dependent on market borrowings. SBI’s 97 per cent liabilities are dependent on deposits, so change in repo rate does not impact SBI’s cost as such. In Indian context repo rate has become a blunt tool for determining the lending rates,” she told the media here.
According to Bhattacharya, banks need to balance their books for faster monetary transmission as liability side of the banks (loans) are tied to floating interest rate and asset side (deposits) are tied to fixed interest rates. “There will always be some time lag for transmission to happen because of the mismatch between the assets and liability. Also, it is difficult for banks to reduce there rates in tandem with repo rate under the existing system,” she averred.
The Reserve Bank of India (RBI) has repeatedly expressed its concern over delay in monetary transmission over the last one year.
While the central bank is now working on implementing marginal cost pricing method for determining the base rate for the lenders, Bhattacharya, based on the draft form, said it may not work in India.
“What RBI suggested initially may not work. All the banks have given their views on it (marginal cost pricing). RBI is coming out with a different guidelines based on those suggestions. Let us await and see what happens,” she said. FE