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The Reserve Bank of India (RBI)’s recent directive on computation of the base rate is proving a stumbling block for lenders in reducing base rates. This is because against expectations, the cost of funds hasn’t declined, say bankers.
Base rate is the benchmark lending rate to which all loan rates are linked.
“I had said the base rate will come down, depending on the calculation for it. But according to the revised calculation, it is not coming down. Going by the old calculation, it will come as a reduction in my deposit cost; so, automatically, the base rate will change. But in the revised guidelines, a majority of your deposit has to be considered; so, my cost does not come down,” said Aditya Puri, managing director of HDFC Bank.
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Earlier, Puri had said as deposit rates had started falling, lending rates were expected to decline in the January-March quarter.
According to the new norms, banks are free to calculate the cost of funds either on the basis of the average cost of funds or on the marginal cost of funds, or any alternative method. But these should be available for scrutiny whenever required, the central bank had said.
State Bank of India (SBI) Chairman Arundhati Bhattacharya said RBI had said the mandate of choosing the maturity bucket with the highest deposits had challenges. “Say, today I have the highest amount (of deposits) in the one-year bucket; in one or two weeks, it could be the one-two year block. Does that mean I shift the base rate immediately? There are difficulties in doing these types of calculations,” she had said while announcing the bank’s earnings earlier this month.
SBI has written to RBI, fro more clarity on the issue.
Another banker said to calculate the cost of funds, lenders earlier considered the interest in the bracket where the rate was the highest; the deposit base could be small. But now, banks have to consider the interest on the tenure with the largest deposit base. “It is because of this that for some banks, the cost of funds hasn’t fallen as expected,” the banker added. In January this year, RBI had cut the repo rate, the rate at which it lends to banks, by 25 basis points. This was followed by widespread expectation that banks would embark on a rate-cut cycle. However, only three lenders — Union Bank of India, United Bank of India and Karur Vysya Bank — reduced their base rates.
“Once you choose a particular methodology, you can change it only once in three years (according to the new norms). There will be no elbow room to change that in between. Therefore, we have taken the time to assess it and we have realised the cost of funds hasn’t come down. As a result, the expected revision in the base rate hasn’t happened so far,” said the chief financial officer of a public sector bank.
Lack of demand is another reason why banks haven’t cut rates. Lenders believe if the base rate is revised, their margins will come under further pressure, as there is no demand to offset this.
