Finance Minister Nirmala Sitharaman on Friday said that banks in India have decided to pass on marginal cost of funds based lending rate (MCLR) rate cuts to all borrowers.
She also said that banks have decided to launch repo rate or external benchmarking-linked loan products, which will reduce EMIs on housing loan, auto and other retail loans.
For reducing harassment and bring greater efficiency, public sector banks (PSBs) are mandated to return loan documents within 15 days after the loan closure, the Minister said.
Over the years, banks have not reduced lending rates in tune with policy rates announced by the Reserve Bank of India (RBI). Between February and June 2019, RBI has reduced policy rates by 75 basis points (bps). According to RBI financial markets have fully transmitted the changes in policy rates. The weighted average call money rate (WACR) fell by 78bps, market repo rate by 73bps and 10-year benchmark G-Sec yield by 102bps. But banks, on the other hand, have reduced their interest rates on fresh rupee loans only by 29bps during February-June 2019.
And yet, earlier this month, RBI governor Shaktikanta Das, had decided to junk the linking of floating interest rates for retail loans to external benchmark. The central bank now wants to consult stakeholders and review liking of floating interest rates with external benchmark. Speaking to reporters after the monetary policy review, governor Das said that RBI is again having stakeholder consultation on linking floating interest rates for retail loans to external benchmark and is reviewing it.
In December 2018, the central bank, then headed by Dr Patel had asked all banks to adopt new external benchmark for providing loans for home, auto and micro and small enterprises (MSME) from 1 April 2019.
“Our interactions with various stakeholders, including both public sector and private sector banks, indicate that steps are being taken by them on an ongoing basis to progressively lower their interest rates so that the benefits of the policy rate reductions are passed on to the economy. Accordingly, we expect higher transmission of monetary policy actions and stance by the banks in the weeks and months ahead,” Mr Das says.
Before the RBI decision of last December, Moneylife Foundation had filed a public interest litigation (PIL) in the Supreme Court (SC) praying for an external benchmark, among other things. The SC had asked RBI to respond to Moneylife Foundation. Instead of a specific response, RBI had gone ahead and announced the external benchmark.
RBI's decision in December 2018 was based on recommendation by Dr Janak Raj Committee. The Committee in its 2017 report "Internal Study Group to Review the Working of the MCLR System" had provided a shocking account of how wide and deep banking malpractices are with regard to floating rate loans. It confirmed every one of our arguments about how banks cheat customers, fudge rates and extort conversion charges.
Dr Patel resigned on 10th December and Mr Das took over as new governor of RBI on 12 December 2018. In April this year, Mr Das, who is a former revenue secretary, decided to keep the issue of linking interest rates to external benchmark on the back-burner, much to the surprise and dismay of borrowers, who have been shortchanged by the banks.
Mr Das, in his first monetary policy decision in February 2019, called Dr Patel’s directions as ‘draft guidelines’. In the April monetary policy statement, Mr Das stated that RBI would hold further consultations with stakeholders and work out an effective mechanism for transmission of rates.
The external benchmark suggested by RBI in December included its policy repo rate, government of India 91 days treasury bill yield produced by the Financial Benchmarks India Pvt Ltd (FBIL), government of India 182 days treasury bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.
At that time, Moneylife Foundation wrote to Dr Patel, the then governor of RBI, requesting to direct banks to calculate the excess interest they have charged (through arbitrary and ad hoc calculations of base rate or MCLR) and refund the money to borrowers, especially retail borrowers and SMEs. (See Excess Interest Charged by Banks under Base Rate and MCLR Regime)
“The RBI should also direct banks to set up special helplines to handle complaints from borrowers, whom banks have overcharged over the years. We also request the Reserve Bank to immediately issue circular/master directions asking banks and financial institutions to allow existing borrowers to migrate to MCLR or any new system without any conversion fee or any other charges for the switchover,” the memorandum had said.
RBI refused to act on it. We then had to file a PIL in the Supreme Court.
The PIL filed by Moneylife Foundation sought justice for a huge section of Indian population including the middle class and lower middle class, who are badly affected by such discrimination. The primary respondent was the RBI. Others named were: ministry of consumer affairs, ministry of finance, Indian Banks’ Association (IBA), National Housing Bank (NHB), Banking Code and Standards Bank of India (BCSBI).