Guidelines by Reserve Bank of India- Banks to set Lending Rates Accordingly

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BUSINESS MANTRA NEWS, FARIDABAD: Author – Lalit Virmani

Every Bank has been setting the Lending Rates for various kinds of Loans to Customers of its own. In other words, all the Banks have the liberty to fix Lending Rates, the parameters being set by their own team of experts in their own way.RBI announced repo-rate cuts three times in the last 12 months and observed that the rate cuts were not passed on to the customers meticulously. While on previous occasions upward revision in rates were immediately changed and customers had to feel the heat.Therefore, it was felt to issue guidelines in this regard for the Banks to set their Lending Rates according to the policy framed by RBI.

Very recently, Reserve Bank of India has issued guidelines for setting of Lending Rates for Banks, making them more responsible for the monetary policy. RBI wants to keep all the Banks protected for their profit margins and simultaneously wants Banks to protect customers’ rights also. In this process, Banks as well as the customers will not lose/gain due to rate change and implementation of the monetary policy changes on account of such rate changes, from time to time, becomes automatic in the interest of the country.crr

RBI proposes to the Banks to set Base Rates, using Marginal Cost of Funds model. RBI has issued draft guidelines to calculate Lending Rates. Under this method, the money market rates shall be affected very quickly with the change in Lending Rates. RBI has sought feedback from the Banks within 15th September, so that implementation is done from 01-04-2016.

It is being felt that the Banks may oppose this move. It is because the market conditions are volatile and Banks need flexibility to set Lending Rates. Banks feel that deposit rates are not immediately responsive to the rate cuts, resulting therein lowering of profit margins. Another difficulty may arise because rates of on-going fixed deposits cannot be changed before maturity.

RBI has strongly advocated in favour of setting Lending Rates which shall make monetary policy more effective and shall keep the market conditions under strict check of RBI and the central government.

Author is a n Ex-Banking Senior Executive. You can reach the author via info@businessmantranews.com

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