Lack of transparency persists over lending rates: Subbarao
Chennai: Concerned over the lack of transparency in bank lending rates, Reserve Bank Governor D Subbarao Wednesday said the central bank has set up a working group to address the issue.
"One problem that has persisted even after the introduction of the base rate system relates to the lack of transparency in the customer-specific spread charged to a borrower over the base rate," Subbarao said in his IOB Platinum Jubilee Oration Series here.
"There have been complaints that the spread charged to a customer has been revised upwards without any apparent change in his/her risk profile," he said.
Also, where floating rate loans are concerned, existing customers have been disadvantaged vis-a-vis new customers with similar credit ratings, resulting in complaints about discrimination, he said.
In order to address this malady, Subbarao said the RBI has set up a working group under chairmanship of Deputy Governor Anand Sinha to determine the principles that must govern proper, transparent and non-discriminatory pricing of credit.
The working group is expected to submit its report by next month, he added.
To improve transparency in interest rate, RBI introduced the base rate from July 1, 2010 in place of the benchmark prime lending rate (BPLR).
Base rate is the minimum lending rate below which a bank cannot lend. However, in the BPLR system, banks were allowed to lend below the benchmark rate.
The BPLR was introduced by the RBI in 2003 to serve as a benchmark rate for lending.
Subbarao said, "Under the new system (base rate), each bank is mandated to determine a base rate of interest to include those cost elements which can be clearly identified and are common across all borrowers - cost of deposits, cost of maintaining the statutory liquidity ratio and cash reserve ratio, cost of operations, and the profit margin."
Banks are allowed to determine the actual lending rate they charge on loans by topping up the base rate with other customer specific charges such as product specific operating costs, credit risk premium and tenor premium, he added.
On the savings bank account, the RBI Governor said, following the deregulation, seven relatively small private banks raised their saving bank deposit rates and expectedly improved their share of this market segment.
The big banks have yet to respond to this but it is expected that whenever that happens, the adjustment will be smooth, he added.
"...The RBI looks forward to more active play in the saving bank segment with banks coming out with some customer friendly innovations especially aimed at attracting low income households, presently outside the banking sector," he added.
Referring to the issue of microfinance institutions, Subbarao said, "the roll out of the new regulatory regime has run into some bottlenecks... The RBI is working on resolving these issues so that MFI operations can get back on track."
Some MFIs are unable to comply with the qualifying asset criterion for registering as a NBFC-MFI, and therefore banks are reluctant to make fresh loans to them as such loans do not qualify as priority sector lending, he said.
On the issue of expansion of priority sector list, he said, "it can deliver on its promise only if the eligible sectors are restricted to a select few which are important from the perspective of improving livelihoods."
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