SC asks cen­tral bank to ex­am­ine if rate cut ben­e­fits reach con­sumers

RBI tells Supreme Court bench that it is will­ing to in­struct banks to lower in­ter­est rates when the repo rate is slashed

Mint Asia ST - - News - BPY RIYANKA M I T TA L

The Supreme Court on Mon­day, 8 Oc­to­ber, asked the Re­serve Bank of In­dia (RBI) to ex­am­ine within six weeks whether the ben­e­fits of cuts in in­ter­est rates are be­ing passed on to cus­tomers.

The cen­tral bank told a bench headed by Chief Jus­tice Ran­jan Go­goi that it was will­ing to in­struct banks to lower their in­ter­est rates when the repo rate was slashed.

The repo rate is the rate at which RBI lends money to com­mer­cial banks.

The apex court or­der came dur­ing a hear­ing on a pe­ti­tion by a non-govern­men­tal or­ga­ni­za­tion (NGO), Moneylife Foun­da­tion, urg­ing the court to direct bank­ing firms and nonbank­ing fi­nan­cial com­pa­nies (NBFCS) to cal­cu­late the amount in ex­cess in­ter­est they have charged bor­row­ers un­der the float­ing rate regime by deny­ing them the ben­e­fit of lower rates.

The NGO also wanted these com­pa­nies to pub­lish on their web­sites ev­ery week the method­ol­ogy by which they set the rate of in­ter­est.

The pe­ti­tion cited a cen­tral bank re­port that found banks were not pass­ing on the ben­e­fits of lower in­ter­est rates to cus­tomers.

The NGO con­tended that the man­ner in which in­di­vid­ual banks and NBFCS im­ple­ment in­ter­est rate di­rec­tives is “ar­bi­trary and dis­crim­i­na­tory”, and in vi­o­la­tion of the fun­da­men­tal rights guar­an­teed un­der Ar­ti­cles 14 (right to equal­ity) and 21 (right to life) of the Con­sti­tu­tion.

The plea al­leged that by fail­ing to take ac­tion on the pe­ti­tioner ’s re­peated re­quests for jus­tice on be­half of cit­i­zens, RBI had de­lib­er­ately ac­qui­esced in the dis­crim­i­na­tion by banks in the name of im­ple­ment­ing the mar­ginal cost of funds­based lend­ing rate (MCLR) regime.

From time to time, RBI has ex­pressed con­cerns about the re­luc­tance of banks to pass on rate cuts to con­sumers, and made sev­eral at­tempts to change the way they price their loans. In 2003, RBI in­tro­duced the bench­mark prime lend­ing rate (BPLR), but this failed to bring in trans­parency, as a large part of the lend­ing took place at in­ter­est rates be­low the an­nounced BPLRS. Then came the base rate, which was to be the min­i­mum rate for all loans and cal­cu­lated on the ba­sis of cost of funds. In­di­vid­ual bor­row­ers were charged a spread over the base ra t e, w h i c h w a s tweaked to ben­e­fit only new bor­row­ers.

The drawbacks of these lend­ing rates l ed RBI to in­tro­duce MCLR in April 2016. How­ever, in the ab­sence of a sun­set clause on the base rate, banks were slow to mi­grate their cus­tomers to the MCLR regime.

In Oc­to­ber 2017, a com­mit­tee un­der the cen­tral bank rec­om­mended link­ing bank lend­ing rates to a mar­ket bench­mark like T-bills, cer­tifi­cate of de­posit or repo rate.

The panel noted that since April 2016, the one-year MCLR had come down by 95 ba­sis points (bps), whereas the repo rate was down by 75 bps, but MCLR had been mostly used for fresh loans.

How­ever, the rec­om­men­da­tion was op­posed by banks, which felt that the regulator should also al­low de­posit rates to be linked to an ex­ter­nal bench­mark if it wanted to ap­ply such a bench­mark to lend­ing rates.

As in­ter­est rates started go­ing up af­ter April 2018, the noise around trans­mis­sion lag abated.

“Ben­e­fit of repo rate cut was passed on to fresh bor­row­ers. Ex­ist­ing bor­row­ers did not see a cut in bor­row­ing rates. These switch­ing costs were also charged, pro­hibit­ing ex­ist­ing bor­row­ers from switch­ing base rate to MCLR, thereby deny­ing the ben­e­fit of lower MCLR to ex­ist­ing bor­row­ers,” said Anul Gupta, sec­tor head, fi­nan­cial sec­tor rat­ings, Icra Ltd. “Though RBI’S pro­posal was to link lend­ing rate to ex­ter­nal bench­mark, in the ris­ing in­ter­est rate sce­nario, it would have led to faster repric­ing even though the down­side was de­nied to ex­ist­ing bor­row­ers.”

Gopika Gopaku­mar in Mum­bai con­trib­uted to this story.

Moneylife, in its plea, said banks are not pass­ing on the ben­e­fits of lower rates to cus­tomers


Seek­ing ac­count­abil­ity: The NGO that filed the pe­ti­tion also wanted lenders to pub­lish on their web­sites ev­ery week the method­ol­ogy by which they set the rate of in­ter­est.

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