Regulations
RBI releases draft guidelines on interest rate methodology
The Reserve Bank has brought out draft guidelines for banks adopting marginal cost of funds methodology while calculating base rates, which it thinks are more sensitive to changes in policy rates
 
The Reserve Bank of India (RBI) on Tuesday, released draft guidelines on base rates for helping transmission of monetary policy rates to banks’ lending rates. The revised methodology in the draft guidelines consist components of base rate, spread, and actual lending rates on the loans determined by adding the components of spread to the base rate in all cases.
 
"It is expected that the guidelines would be helpful in the medium term goal of banks pricing their floating rate loans linked to an external benchmark. The components of base rate will include cost of funds, negative carry on cash reserve ratio (CRR)/statutory liquidity ratio (SLR), un-allocable overhead costs and average return on networth," RBI said in a release.
 
At present, banks are following different methodologies in computing their base rate – on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). Base rates based on marginal cost of funds should be more sensitive to changes in the policy rates. In order to improve the efficiency of monetary policy transmission, the Reserve Bank said it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their base rate. 
 
Earlier in its first bi-monthly policy, the central bank had said that for monetary transmission to occur, lending rates have to be sensitive to the policy rate.
 
Based on supervisory findings and discussions with banks, the RBI has reviews its extant guidelines on computation of base rate as well as the methodology for determining lending rates. The banks will now be required to compute their base rare on revised methodology. 
 
a) Components of Base Rate
The components of base rate will include cost of funds, negative carry on CRR/SLR, un-allocable overhead costs and average return on networth which will be calculated as under:
 
(i) Cost of Funds
 
The marginal cost of funds should be used for computing the cost of funds. The marginal cost should be arrived at by taking into consideration all sources of fund other than equity. Cost of deposits should be calculated using the latest interest rate/card rate payable on current and savings deposits and the term deposits of various maturities. Cost of borrowings should be arrived at using the average rates at which funds were raised in the last one month preceding the date of review. Each of these rates should be weighted by the proportionate balance outstanding on the date of review.
 
ii) Negative carry on CRR and SLR
 
Negative carry on the mandatory CRR arises because the return on CRR balances is nil. Negative carry on SLR balances may arise if the actual return thereon is less than the cost of funds.
 
(iii) Unallocable overhead cost
 
The unallocable overhead costs should comprise solely of costs incurred for the bank as a whole and, hence, not allocable to any particular business activity/unit. These components would be fixed for 3 years, subject to review thereafter. 
 
(iv) Average Return on networth
 
Average return on net worth is the hurdle rate of return on equity determined by the Board or management of the bank. It is expected that the component representing ‘return on networth’ will remain fairly constant and any change would be made only in case of a major shift in the business strategy of the bank.
 
(b) Spread
RBI said, as per its circular issued on 19 January 2015, banks should delineate the components of spread with the approval of their Boards. For the sake of uniformity in these components, broad components of spread finalised by Indian Banks' Association (IBA) should be adopted by all banks.
 
(c) Interest Rates on Loans
The actual lending rates on the loans will be determined by adding the components of spread to the base rate in all cases, the central bank said.
 
(d) Time frame for implementation
RBI says the proposed effective date of these guidelines would be 1 April 2016. Banks should submit a road map clearly indicating the time frame for adopting the above to the Department of Banking Supervision within two months from the date of the final circular, RBI said.
 
Comments or feedback can be e-mailed or sent by post to the Chief General Manager, Directives Division, Department of Banking Regulation, Reserve Bank of India, Central Office, 13th Floor, Shahid Bhagat Singh Marg, Mumbai- 400 001 on or before 15 September 2015, the central bank said.
 

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COMMENTS

MG Warrier

1 year ago

It is time banks started taking note of realities concerning interest rates. There is a limit up to which the demand for 'rate cuts' by RBI can cover up the real culprit in the prvailing high interest rates on loans and relatively low deposit rates. The present draft guidelines released by RBI should be an eye opener for big banks and even IBA. The need for high margins is a function of high NPAs, inefficient fund management, sagging employee morale which affects incremental business(both deposit mobilisation and credit expansion). A regulatory or supervisory organisation will not be in a position to 'apply mind' for the institutions it regulates or supervises. It is in banks' interest not to allow things to go back to olden days when interest rates were regulated.

10 lakh bank employees to participate in nationwide strike on Wednesday
Due to the strike call given by unions on 2 September 2015, banking activities including clearing operations will be affected besides hampering normal banking activities across the country
 
Almost 10 lakh bank employees and officers from public sector banks (PSBs), private sector banks, foreign banks, regional rural banks and co-operative banks would participate in the nation-wide strike called by trade unions on Wednesday. 
 
All India Bank Employees Association (AIBEA) and 13 other unions from banks would observe a strike on 2 September 2015, against the anti-labour, anti-people policies of the Central Government and in support of the call given by the Central Trade Unions in the country," says Vishwas Utagi, Vice President of AIBEA.
 
"Because of the bank strike on 2 September 2015, banking activities including clearing operations will be affected and normal banking activities will be hampered.  The strike has been forced on the Unions by the Government's adamant and anti-labour policies," he added
 
Mr Utagi said, there are increasing attacks on the workers on their rights and privileges and encouragement and concessions are being extended to the employers in our country.  There are open attempts to amend the various labour laws in favour of the employers and to the detriment of the workers. The neo-liberal economic policies are only aggravating the problems of the workers and common masses, he added.
 
According to the unions, in the banking industry, there are continuous attempts to push through the reforms agenda aimed at privatisation of banks, consolidation and merger of Banks. "More and more private capital and foreign direct investment (FDI) are being encouraged. Private sector companies are being allowed license to start banking business. Regional Rural Banks are sought to be privatised and the Bill has been passed by the Government in the Parliament despite protests by our Unions. Primary Agricultural Co-operative Societies (PACs) are under threat of winding up. Urban Co-operative Banks are under threat of delicensing. Private sector executives are imposed on the public sector banks.  All the Government schemes are being imposed on the Banks without proper infrastructure and manpower resulting harassment and problems faced by the bank staff.  Permanent and regular jobs are being outsourced on contract basis and contract employees are being exploited," Mr Utagi said in a release.
 

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COMMENTS

Meenal Mamdani

1 year ago

Bank employees will lose sympathy of the common man if they persist in putting their own rights and welfare ahead of those that they serve.

Maruti Suzuki's August sales up 6.4%
Leading automobile manufacturer Maruti Suzuki on Tuesday reported a 6.4 percent increase in its sales for August, 2015.
 
The company sold 117,864 units during the month under review from an off-take of 110,776 units in the corresponding month of 2014.
 
The automobile manufacturer's sales during July had risen by 20 percent with the company selling a total of 121,712 units.
 
Domestic sales during the month under review rose by 8.6 percent at 106,781 units from 98,304 units sold in August, 2014.
 
Exports plunged by 11.1 percent in the month under review with 11,083 units being shipped-out from 12,472 units being sold abroad during the corresponding month of 2014.
 
The exports during July had risen by a mere 0.2 percent at 11,307 units. 
 
The sales of passenger car segment surged 4.4 percent to 86,454 units being sold during last month from 82,823 units off-take in the like period of last year.
 
The company's passenger car segment comprises of brands like Alto, WagonR, Swift, Ritz, Celerio, Dzire, Dzire Tour, SX4 and Ciaz.
 
The off-take of utility vehicles which comprises of brands like Gypsy, Ertiga and the new crossover S Cross rose by 42.7 percent at 7,836 units from sales of 5,491 units in Agust, 2014.
 
The sales of van segment, which includes Omni and Eeco, increased by 25 percent at 12,491 units from an off-take of 9,990 units in the corresponding month of previous year.
 
The company's scrip at the Bombay Stock Exchange (BSE) declined by 1.88 percent at Rs.4,089.25 around 2.00 p.m. from its previous close of Rs.4,167.50 on Monday.

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