Banks must use new method: RBI
Rajan said banks are making loans based on the rates prevailing in the market at current points
Mumbai: Getting tough on banks for their reluctance to move towards a transparent interest rate regime, RBI governor Raghuram Rajan on Tuesday insisted that the lenders will have to follow the new computation methodology.
He, however, promised to look into banks’ concern over adopting the marginal cost-based base rate regime. Currently, Indian banks follow an average cost, where the banks fix lending rate on the basis of an average cost of funds plus profit.
On September 1, the regulator had put out draft guidelines on computation of base rate based on marginal cost of funds methodology. It had asked for comments on the draft. The central bank said that the final guidelines on base rate calculation will be issued by the end of November.
“Our banks will have to move towards that, we cannot continue protesting,” Dr Rajan told analysts after the policy announcement. “We live in a marginal cost world, we don’t live in an average cost world because incremental loans are made in respo-nse to competition from market which don’t have any memory.”
He said banks are making loans based on the rates prevailing in the market at current points. Dr Rajan said banks have typically become used to reasonably slow moving base rate which gives them time to adjust the deposit cost before they adjust lending. He, however, said des-pite the slow moving base rate, banks have been quite fast in the cycle to adjust deposit cost downwards.