​Financials - Banks: RBI reviews working of MCLR; The unsatiated desire for perfect lending rate regime
RBI reviews working of MCLR – earnings/margin volatility to increase
The RBI working group has found monetary policy transmission to be inadequate under the current MCLR/base rate regime. This is more so in the case of outstanding loans, wherein the longer reset period and the discretionary spreads being charged by banks have prevented proper pass-through of reduction in lending rates. Besides, the computation of base rate and MCLR has also been found to be inconsistent among banks thus putting borrowers at a disadvantage. The group also highlighted that monetary transmission remains asymmetric over the monetary policy cycles – higher during the tightening phase and lower during the easing phase, irrespective of the interest rate methodology being followed. The working group has thus suggested that banks need to move to one of the following external benchmarks – (i) T-Bill rate, (ii) CD rate and (iii) repo rate to price their loans, after due consultation with the RBI and other stakeholders. Also, the group suggested that the external benchmark should be adopted from 1 April 2018, and thereafter, all existing loans (BPLR/base rate/MCLR) should be moved to the new benchmark within one year (i.e. by March 2019).
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