HYDERABAD : Will the RBI’s directive linking retail and MSME floating rate loans to an external benchmark from April face resistance from banks? Sources said lenders, who are awaiting final guidelines expected this month, will initiate a dialogue with the regulator to find a common ground. It may be recalled that banks had opposed the proposed move early this year and suggested that deposits too should be linked to market rates. However, RBI stuck to its stance, moving only floating rate loans to an external benchmark.
“It doesn’t make logical sense, when deposits aren’t being moved to market rates. None of the banks have any retail deposits on floating rates. So basically, cost of funds will not have any relationship. If deposits too are linked to external benchmark, it’ll take off very well,” said V G Kannan, Chief Executive, Indian Banks’ Association (IBA).
Bankers, who have had informal discussions on the proposal with RBI recently, were hoping continuity of conversation, but the regulator’s move on Wednesday took them by surprise. “It came out of the blue. We thought there will be another discussion before a final call is taken,” an official said. IBA, on its part, hopes to take up the issue with RBI once the guidelines are in place.
Lenders feel MCLR regime should continue, as “one-and-a-half year is too short a period to assess its effectiveness.” “The IBA and banks in general have expressed that the MCLR system is working well and it should continue. All banks, barring some foreign ones, are of the view that none of the three external benchmarks recommended by the study group can be adopted in the near-to-medium run, since banks’ funding cost is not related directly to any of the proposed external benchmarks,” noted RBI’s internal study group on switching over from MCLR.
One of the key reasons for banks’ opposition is because loans are typically funded by retail deposits and not wholesale unlike developed markets. “Therefore, if interest rates on deposits remain sticky, banks cannot lend at rates linked to an external benchmark, which may change every day, unless they manage this interest rate risk well,” a banker reasoned, suggesting an ideal benchmark based on deposit rates instead of a market rate. According to banks, an external benchmark could make spread decisions more complex due to uncertainty about managing interest rate risk.