A proposal from a Reserve Bank of India-appointed committee to use the cost of one-year retail deposits as the benchmark for calculating the proposed benchmark lending rate is being opposed by banks.
Bankers have said that the new formula to arrive at the base rate, which would replace the system of benchmark prime lending rate (PLR), needed to be different from what was suggested by the committee headed by RBI Executive Director Deepak Mohanty. The committee had recommended that the card rate for one-year retail deposit below Rs 15 lakh should be the basis for base rate calculation with other costs added to it.
“The base rate should be benchmarked to the average cost of deposits, rather than the interest paid on one-year retail deposits. Banks can keep interest rate paid on 365-day deposits at a higher level, but for 364 days or for 366 days, the interest rate paid can be lower,” said a banker.
According to an analysis undertaken by a large Mumbai-based bank, about 80 per cent of deposits were concentrated in maturity baskets that offered the highest rate. Unlike last year, when deposits with a maturity of around three years were earning the highest rate, longer maturities of eight to 10 years are earning the peak rate now.
“It is quite possible that the rate offered by a bank for 365-day maturity is less than the rates offered for other maturities. If a bank’s peak deposit rate is for maturities which are higher than one year, then the bank will make a loss if it benchmarks its lending rate to one-year maturity. Taking one-year maturity may lead to incorrect interest cost loading,” a banker said.
“We need to take the average cost of deposit rather than the one-year retail card deposit rate,” he added.
In addition, banks are also opposing the benchmarking of retail deposit rate.
RBI had proposed the constituents of base rate to be the card interest rate on retail deposits with one-year maturity, adjustment for the negative carry in respect of cash reserve ratio (CRR) and statutory liquidity ratio (SLR); unallocatable overhead cost for banks which would comprise a minimum set of overhead cost elements, and average return on net worth.
