Joydeep Sen
So many times you have wondered, while interest rates have been coming down in response to benign inflation and sagging GDP growth rates, the floating rate loan which you had taken long ago, is not coming down as much. You enquire with your bank about the new lower rates advertised boldly, and get the response that the revised rates are meant for new borrowers. You wonder, what wrong you did by being an old customer. This is a kind of discrimination.
This is set to change, upon RBI’s proposed ‘external’ benchmark for loans, a benchmark on which the bank has no control. At this stage, it is not a regulation, but a proposal. There will be a public debate and the RBI will take feedback from various stakeholders. The scheduled date for implementation is April 1 2018 for all new floating rate loans. All existing floating rate loans would be migrated to the new system by March 2019. The important aspect is, whatever is finally decided as a benchmark after the debate, would be implemented across all loans and discrimination towards old (existing) borrowers would come to an end.
One reaction that has come immediately after the release of RBI’s Internal Study Group on Working of the Marginal Cost of Funds Based Lending Rate System is from bankers. The reaction is, deposits also should be linked to an external benchmark. The reason is, if the external benchmark comes down, Banks’ earnings from floating rate loans will come down whereas expenses on deposits will remain same. It is a fair argument, that if one side of the bank’s balance sheet, the asset side, is marked to an external benchmark, the liabilities side of the balance sheet also should move in a similar direction. If this suggestion is implemented, it will be a sea change in the way we use banks and bank deposits. When a customer, particularly in rural areas, sees his or her interest rate on the deposit come down, it would come as a shock. The RBI will consider both sides; the ‘culture shock’ of bank customers on variable interest rates on deposits and fairness on banks on allowing floating rates on both sides.
RBI is not averse to the idea of floating rate deposits. The Report says, banks may be encouraged to accept deposits, especially bulk deposits at floating rates linked directly to one of the three external benchmarks selected by the RBI after receiving the feedback from stakeholders as recommended by the Study Group. One relevant aspect here is, if all deposits are allowed to be floating, marked to a benchmark, then all bank loans should be floating, but there will be fixed-rate customers as well. There should be some proportionality between floating rate deposits and floating rate loans.
Now let us look into some of salient aspects of the recommendations: (a) the three external benchmarks proposed are Treasury Bill rates, Bank CD rates and RBI policy repo rate; (b) the switchover to the new rate regime should happen without any fees or charges to customers; (c) banks should recalculate the base rate by removing or re-adjusting arbitrary and discretionary aspects; (d) the spread or mark-up over the benchmark will be decided by the bank, but the spread fixed at the time of sanction of loans should remain same through the tenure of the loan, unless there is a clear credit event necessitating a change in the spread and (e) the periodicity of resetting the interest rates by banks on floating rate loans should be once in a quarter and not once in a year.
Over the last couple of years, there have been improvements in the consumer protection aspects of banks’ customers. Earlier, the RBI would give signals on interest rate movement through changes in repo rate. On the transmission of the signals to interest rates on the ground, there would be some mention here and there, but there was no concrete action. The move to Marginal Cost of Funds Based Lending Rate System (MCLR) is a concrete measure, which necessitates linking of new loan rates to the relevant deposit rates and not old ones. To be fair to old floating rate based customers, all loans should be migrated to the new reality, which has been initiated now. There will be a debate now on various aspects on the proposals, including linking of longer tenure loans to very short period money market benchmark like RBI repo rate or T-Bill rate. The new regime, as and when implemented, will impact customers on both directions: positively when interest rates are coming down and adversely when interest rates are moving up. But any regime should be fair on both the counterparts, banks and customers.
(The writer is independent financial advisor)
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