 "Draft norms on marginal cost of fund not feasible: SBI")
The present Reserve Bank of India (RBI) draft guidelines on computation of the base rate of banks, linked to marginal cost of funds, were not going to work out, and bankers had already given their suggestions to the regulator, said Arundhati Bhattacharya, chairman, State Bank of India (SBI), on the sidelines of an interactive meet with the Ladies Wing, Bengal National Chamber of Commerce and Industry here on Thursday.
Bhattacharya also suggested that for banks to pass on the repo rate rate cut to borrowers, on the lines of the fixed tenure and rates on deposits, on the lending side too, lenders should be allowed to immediately charge lower interest only for new loans. On old loans, the new rates could be applicable only after a year, she suggested. Further, repo rate was a “blunt instrument” in deciding the interest rate, she added.
“We need to look at how we can balance the book better. For example, if our deposits are at fixed rates, the borrowing should also be on a fixed rate, to be re-priced only one year later. In that case, if I cut the base rate, only the new borrowings will be on that rate, not the old one. Maybe, we will have to do tweaking of this nature for a more frequent passing of rate cut,” Bhattacharya said.
“As RBI had asked, we have given our responses. RBI will come out with different guidelines. What they had suggested initially is something that is not going to work. The suggestions have been given by all banks,”said Bhattacharya.
In its fifth bi-monthly monetary policy statement on Tuesday, RBI had said it would shortly announce the new formula for base rate.
About 97 per cent of the liabilities of SBI were linked to deposits, which would not be affected by the repo rate cut. Moreover, with 40 per cent of the deposits of the bank to be current account savings account (Casa) deposits, the benefit of lower interest rate was applicable to only 60 per cent deposits, she said. All this rendered it difficult to pass on the whole cut to the borrower.
“In 2013, interest rates went up by 300 basis points, but banks never raised (their rates) to that extent.... Repo rate in the Indian context is a blunt instrument. We have to see how to make it more reflective of what we want to do,” said Bhattacharya.
One reason why the public sector banks (PSBs) are saddled with a huge amount of non-performing assets (NPAs) is that PSBs have to follow elaborate processes to shed bad loans, unlike private banks. “Public sector banks have to follow elaborate processes. If PSBs want to get rid of NPAs, they have to do it through an auction route. If the first auction fails, they have to do a second auction. Only if the second auction fails, they can directly sell bad assets. If one can’t sell off the NPAs quickly, their asset quality keeps deteriorating. However, even within the system, PSBs are quite efficient,” she said.
Fed impact minor
Bhattacharya said the US Federal Reserve’s decision to raise rates would not have a major impact, as this had already been factored in by the market. “It is quite certain that there will be rate hike by Fed. However, it will not have a major impact, as it has been already discounted by the market,” she said.
US Fed chief Janet Yellen had said on Wednesday that economic conditions were ripe enough for the Fed to start raising its benchmark interest rate this month.
Bhattacharya also suggested that for banks to pass on the repo rate rate cut to borrowers, on the lines of the fixed tenure and rates on deposits, on the lending side too, lenders should be allowed to immediately charge lower interest only for new loans. On old loans, the new rates could be applicable only after a year, she suggested. Further, repo rate was a “blunt instrument” in deciding the interest rate, she added.
“We need to look at how we can balance the book better. For example, if our deposits are at fixed rates, the borrowing should also be on a fixed rate, to be re-priced only one year later. In that case, if I cut the base rate, only the new borrowings will be on that rate, not the old one. Maybe, we will have to do tweaking of this nature for a more frequent passing of rate cut,” Bhattacharya said.
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RBI had come out with draft guidelines for the new way computation of base rate in September, where it had proposed to link it to the marginal cost of fund or the incremental cost of borrowing more money to fund assets or investments.
“As RBI had asked, we have given our responses. RBI will come out with different guidelines. What they had suggested initially is something that is not going to work. The suggestions have been given by all banks,”said Bhattacharya.
In its fifth bi-monthly monetary policy statement on Tuesday, RBI had said it would shortly announce the new formula for base rate.
About 97 per cent of the liabilities of SBI were linked to deposits, which would not be affected by the repo rate cut. Moreover, with 40 per cent of the deposits of the bank to be current account savings account (Casa) deposits, the benefit of lower interest rate was applicable to only 60 per cent deposits, she said. All this rendered it difficult to pass on the whole cut to the borrower.
“In 2013, interest rates went up by 300 basis points, but banks never raised (their rates) to that extent.... Repo rate in the Indian context is a blunt instrument. We have to see how to make it more reflective of what we want to do,” said Bhattacharya.
One reason why the public sector banks (PSBs) are saddled with a huge amount of non-performing assets (NPAs) is that PSBs have to follow elaborate processes to shed bad loans, unlike private banks. “Public sector banks have to follow elaborate processes. If PSBs want to get rid of NPAs, they have to do it through an auction route. If the first auction fails, they have to do a second auction. Only if the second auction fails, they can directly sell bad assets. If one can’t sell off the NPAs quickly, their asset quality keeps deteriorating. However, even within the system, PSBs are quite efficient,” she said.
Fed impact minor
Bhattacharya said the US Federal Reserve’s decision to raise rates would not have a major impact, as this had already been factored in by the market. “It is quite certain that there will be rate hike by Fed. However, it will not have a major impact, as it has been already discounted by the market,” she said.
US Fed chief Janet Yellen had said on Wednesday that economic conditions were ripe enough for the Fed to start raising its benchmark interest rate this month.