A report out by the Reserve Bank of India (RBI) warns banks across the country that their “ad hoc” processes to inflate lending rates or prevent them from falling is having an adverse effect on small- and medium-sized business (SMB) borrowers.
News reports in Moneylife on Monday (Oct. 9) said an RBI Internal Study Group, established last July, found that banks are deviating away from specified ways of calculating base rates and marginal cost of funds-based lending rates (MCLR).
“The ad hoc adjustments used by banks included inappropriate calculation of the costs of funds; no change in the base rate even as the cost of deposits declined significantly; sharp increase in the return on net worth out of tune with past track record or future prospects to offset the impact of reduction in the cost of deposits on the lending rate and inclusion of new components in the base rate formula to adjust the rate to a desired level,” the Reserve Bank of India’s Internal Study Group concluded. “The slow transmission to the base rate loan portfolio was further accentuated by the long (annual) reset periods).”
Analysts also determined there was a “lag” between the reduction in MCLRs to lending rates, in some cases taking nearly six months or longer to transition from lower MCLR to actual lending rates.
According to researchers, SMBs have been impacted directly from this trend.
“In the absence of any sunset clause on the base rate, banks have been quite slow in migrating their existing customers to the MCLR regime,” the report stated. “Most of the base rate customers are retail or small and medium enterprise borrowers. Hence, the banking sector’s weak pass through to the base rate is turning out to be deleterious to the retail and SME borrowers in an easy monetary cycle.”
The group is recommending that banks immediately recalculate base rates and allow existing borrowers to migrate to the lower MCLR without conversion fees or any changes to already agreed-upon loan terms.
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