After Rate Cut, Rajan Has More Good News

The Reserve Bank of India on Monday said banks would have to review their base rate, or the minimum lending rate, every quarter. This move will benefit borrowers as banks would now have to pass on lower rates from RBI in shortest possible time, said Ram S Sangapure, executive director at Punjab National Bank.

Earlier, banks reviewed their base rates periodically but there was no guideline for base rate revision to be done in every quarter, he said.

The new direction comes at a time when the only two lenders have lowered their base rates following a surprise rate cut by Governor Raghuram Rajan last week.

With mandatory revision of base rate every quarter, "RBI is trying to transmit its policy with minimum time lag to customers," Mr Sangapure said. The new base rate norms come into effect in about a month.

Mahesh Nandurkar, executive director at CLSA, says RBI could cut repo rate by 100 bps this year and banks could lower interest banks by even more as the credit demand remains weak.

In another move, the RBI has allowed the banks flexibility to revise their methodology for calculating their base rate every three years instead of five years earlier. Some banks used to calculate their base rates based on their cost of deposits of the previous quarter or their marginal cost of deposits or interest rate linked to a particular tenure of fixed deposit, said Mr Sangapure of Punjab National Bank. The RBI has allowed the banks flexibility to choose a particular methodology for calculation of base rates. But the central bank has said that where the banks are opting for base rates linked to fixed deposit rates, they should take into account deposits that have the largest share of their base. This move will bring in more transparency in base rates, Mr Sangapure said.

In another change to base rate rules, the RBI said the "change in tenor premium should not be borrower specific or loan class specific". Tenor premium is the extra rate banks charge over the base rate. Banks fix the tenor premium according to their internal policy. For example, if the base rate of a bank is 10 per cent and premium is 0.50 per cent for a 10-year loan, then the applicable rate for customers would be 10.50 per cent.

Mr Sangapure of Punjab National Bank said interest rates on some advances, particularly those issued at base rate for affordable houses, could go up. But since interest rate cycle is moving downward, the impact may not be visible if base rates do down.