Use uniform method to calculate lending rate: RBI to banks

The Reserve Bank of India (RBI) issued draft guidelines on Tuesday for its proposed plan to change the method by which banks calculate their lending rates in order to make them more responsive to the Central bank's monetary policy actions. Banks currently have a lot of freedom in determining their lending rates but RBI officials are of the view that bankers are concentrating too much on protecting their profit margins and not passing on its rate cuts quickly enough.

In spite of RBI Governor Raghuram Rajan coming down heavily on banks for not passing on the entire benefit of its 75 basis points rate cut since January 15, lenders have reduced base rates only by about 30 basis points citing higher cost of funds. During the last monetary policy review, on August 4, Rajan had even said that the RBI would not reduce rates unless banks pass on the earlier rate cuts to consumers. In the first Bi-monthly Monetary Policy Statement 2015-16 in April, the RBI had said that in order to improve the efficiency of monetary policy transmission, it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their base rate.

Banks follow different methods for computing base rate. While some use the average cost of funds method, others have adopted the marginal cost of funds and some the blended cost of funds (liabilities) method. The RBI has unveiled the detailed draft guidelines on how banks should calculate their lending rates and asked for feedback by September 15.

"For monetary transmission to occur, lending rates have to be sensitive to the policy rate," the RBI said. Banks have also maintained they will lower lending rates as soon as they can but are constrained because they must weigh how much they are receiving in deposits with interest they owe to customers and companies.