“Set Your Base Rate on the Basis of Marginal Cost of Funds wef 01-04-2016 onwards” says RBI to Banks

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Business Mantra : Faridabad

Mr. Raghu Ram Rajan, Governor of RBI has been regularly emphasizing the need of passing on the interest rate cuts, but Banks have been turning a deaf ear to his assertions. In the year 2015, Reserve Bank of India reduced rate of interests to the tone of 1.25 % but banks in all did not pass on the reduction to the consumers fully, but just reduced interest rates (average) 0.60 %. But, whenever there is an upward revision, Banks act very fast in announcing such upward changes. So it is need of the hour to change the policy of setting Base Rates.

Reserve Bank of India has now directed all scheduled commercial banks to make adequate arrangements to be more transparent and calculate Base Rates on the basis of Marginal Cost of Funds each time, the rate of interests are changed by review of monetary policy and meticulously follow the instructions to such change in interest rates with effect from 01-04-2016.

Presently all Scheduled Commercial Banks use different methods to compute their Base Rates like ‘Cost of Funds’ or ‘Blended Cost of Funds (Liabilities)’ and few Banks have adopted the theory of ‘Marginal Cost of Funds’. Reserve Bank of India has found the method of ‘Marginal Cost of Funds’ more sensitive to changes announced in the monetary policy.

In the case of Marginal Cost of Funds method, the Banks shall have to announce/publish Marginal Cost of Funds with the maturity period of Loans like overnight loans, one month, two months, half yearly, yearly Loans. The Base Rate shall also have the components like Deposit Costs, SLR cost, CRR cost, Un-allocable overhead costs and average Return on net-worth.

Finally Reserve Bank of India has put a check on the Banks who have been acting arbitrary in setting Base Rates, so that the borrowers are benefitted by reduction in rate of interest.

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