Source ETimes
MUMBAI: A simple promise to give a fair deal to small and retail borrowers has sparked differences
between the Reserve Bank of India and big lenders. The differences are holding back the final guidelines on ‘base rate’ — the new interest rate benchmark that banks will use to price loans.
The banking regulator is insisting that the final communiqué on base rate should state that “lending rates will be fair and non-discriminatory to all retail and small borrowers (mainly farmers)”. Bankers feel that the seemingly harmless sentence in the policy could cause endless feuds between lenders and borrowers.
“A borrower with a 15-year loan may move consumer court on the grounds that he/she is being charged a higher interest rate than someone who has taken a 10-year loan...such a clause would be misleading and could lead to unnecessary problems,” said a senior official of a private bank.
The RBI’s draft note on base rate says, “Apart from transparency, banks should ensure that interest rates charged to customers in the above arrangement (base rate system) are non-discriminatory in nature”. At a meeting with RBI deputy governors in March, bank CEOs urged the regulator to drop the sentence from the final circular. But the central bank is not willing to give in.
There have been several instances where banks have charged different interest rates on loans with the same tenor, said an RBI official. While giving loans to companies, banks charge different risk premiums depending on the borrower’s creditworthiness. Then there is a tenor premium—longer the loan, higher the charge. But for retail borrowers, it’s the loan tenor premium which is factored in. “The RBI wants to protect the interests of retail and small customers. As far as companies are concerned, they are well-placed to extract the best deal for themselves,” said the official.
The base rate—the final circular on which was supposed to be issued a fortnight ago—will be effective from July 1, and will replace the prime lending rate (PLR). While PLR takes into account the cost, profit margin and risk premium, the base rate factors in only cost and profit margin. Under the new arrangement the risk and tenor premia will be charged over the base rate.
The regulator also felt that banks were not pricing their loans accurately. When liquidity was high and there was pressures to meet loan targets, banks gave loans at rates way below their cost, without taking into account the risk premium. Often, this was done to maintain relationship with large borrowers.
The RBI is insistent on inserting the ‘fair and non-discriminatory clause’ to avoid a repetition of what happened in the recent interest rate cycle when several small and retail borrowers did not get the full benefit from the fall in interest rates. While most banks lowered interest rates for new customers, the reduction on old floating rate loans was marginal. Banks argued they could offer lower rates only to new loans since there was a drop in the incremental cost of funds. But RBI said that lower incremental cost brings down the average cost of funds, and the gains should have been passed on to old borrowers.
The banking regulator is insisting that the final communiqué on base rate should state that “lending rates will be fair and non-discriminatory to all retail and small borrowers (mainly farmers)”. Bankers feel that the seemingly harmless sentence in the policy could cause endless feuds between lenders and borrowers.
“A borrower with a 15-year loan may move consumer court on the grounds that he/she is being charged a higher interest rate than someone who has taken a 10-year loan...such a clause would be misleading and could lead to unnecessary problems,” said a senior official of a private bank.
The RBI’s draft note on base rate says, “Apart from transparency, banks should ensure that interest rates charged to customers in the above arrangement (base rate system) are non-discriminatory in nature”. At a meeting with RBI deputy governors in March, bank CEOs urged the regulator to drop the sentence from the final circular. But the central bank is not willing to give in.
There have been several instances where banks have charged different interest rates on loans with the same tenor, said an RBI official. While giving loans to companies, banks charge different risk premiums depending on the borrower’s creditworthiness. Then there is a tenor premium—longer the loan, higher the charge. But for retail borrowers, it’s the loan tenor premium which is factored in. “The RBI wants to protect the interests of retail and small customers. As far as companies are concerned, they are well-placed to extract the best deal for themselves,” said the official.
The base rate—the final circular on which was supposed to be issued a fortnight ago—will be effective from July 1, and will replace the prime lending rate (PLR). While PLR takes into account the cost, profit margin and risk premium, the base rate factors in only cost and profit margin. Under the new arrangement the risk and tenor premia will be charged over the base rate.
The regulator also felt that banks were not pricing their loans accurately. When liquidity was high and there was pressures to meet loan targets, banks gave loans at rates way below their cost, without taking into account the risk premium. Often, this was done to maintain relationship with large borrowers.
The RBI is insistent on inserting the ‘fair and non-discriminatory clause’ to avoid a repetition of what happened in the recent interest rate cycle when several small and retail borrowers did not get the full benefit from the fall in interest rates. While most banks lowered interest rates for new customers, the reduction on old floating rate loans was marginal. Banks argued they could offer lower rates only to new loans since there was a drop in the incremental cost of funds. But RBI said that lower incremental cost brings down the average cost of funds, and the gains should have been passed on to old borrowers.
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