Old borrowers get nothing from the RBI

MUMBAI: Old borrowers have not benefited from four successive rate cuts by the Reserve Bank of India since February and the central bank has blamed the small savings rate system for causing rigidities in transmission.Borrowing cost for old borrowers rose 7 basis points despite 110 bps rate cuts between February and September, data released by RBI show.While the weighted average lending rate (WALR) on fresh rupee loans decreased by only 29 bps between February and August 2019 during which the Reserve Bank of India lowered the repo rate by 110 basis points (one basis point or bps is 0.01 percentage point), the rates on outstanding rupee loans or for old existing borrowers, in contrast, increased.“The inadequate transmission essentially reflects slow adjustment in bank term deposit rates. This, in turn, reflects the long maturity profile of bank deposits at fixed interest rates,” the RBI said in its latest monetary policy report.One of the important factors impeding monetary transmission is the government’s administered interest rates on small saving schemes. These administered interest rates are linked to G-sec rates with a lag and are fixed on a quarterly basis at a spread ranging from 0-100 bps over and above the G-sec rate of comparable maturities.Interest rates on small saving schemes were revised on June 28, 2019 for the second quarter of FY20, which came into effect from July 1, 2019. As a result, the rate system also did not deliver effective transmission as banks were slow to adjust their deposit interest rates which had a bearing on their lending rates, RBI said.Actual lending rates comprised marginal cost of funds based lending rate (MCLR) and a spread until end-September. To address these concerns, the RBI mandated all commercial banks, excluding regional rural banks, to link all new floating rate personal or retail loans and floating rate loans to micro and small enterprises to the policy repo rate or 3-month T-bill rate or 6-month T-bill rate or any other benchmark market interest rate published by Financial Benchmarks India Private Ltd. (FBIL) effective October 1, 2019, following the recommendations by an internal group. External benchmarks are transparent as they are available in the public domain and hence easily accessible for borrowers. The external benchmark framework will improve transmission, RBI said.

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