This refers to advice given to public sector banks not to use government capital to absorb bad debts but to use only for growth .
RBI is well aware that capital infused by Government of India to weak bank is used only to cater to needs created by provisions made towards bad debts . As bad debts are increasing in volume, banks are required to provide more towards them and as provision increases, net profits come down and even loss is booked in some banks, and when profit is given to government of India as dividend or loss is booked, it is only capital of the bank which shrinks compared to growth in total advances .
Obviously when capital shrinks, it is GOI which is constrained to infuse fresh capital to maintain adequate capital adequacy ratio of the bank as per international norms or as per RBI norms. Indirectly such infusion is only to feed bad debts .Government and RBI live in fools paradise if they think that banks are using fresh capital to feed growth or they want to fool people of India by giving such false statement in public domain.
RBI has issued fresh guideline for banks to decide policy rates. This is not new for RBI. n the past too , RBI has issued guidelines for fixing base rate. But RBI is not bothered whether banks are executing the guidelines in true spirit or not. Normally banks alter base rate to please minister . As soon as Finance Minister or Prime Minister suggest reduction in interest rate, CMD of some bank or the other come forward and alter Base rate overnight without going through cumbersome process of fixing base rate. There is no doubt that banks offer concession to take over loan accounts from sister banks of the same government i.e. from other public sector bank and this is directly making mockery of base rate fixed by them .Banks are least bothered of Net interest margin getting thinner and thinner . Despite all concessions , banks fail to stop rise in stressed assets , though they fraudulently increase business volume .
Further ,Banks are constrained to sacrifice huge amount of earned income in writing off of bad loans and interest which result in reduction in yield rate on advances. On the contrary they do not reduce interest on deposits in fear of loosing business garnered after much marketing. As a consequence, net interest margin become thinner and the capacity of reducing interest rate for any bank is minimised . This is why despite several cut in Repo rate by RBI, banks are not in a position to cut interest rate.
I am very happy that RBI has now suggested that bank must move to marginal cost for new base lending rate , instead of giving generalised instruction to all weak and strong banks. Whatever be the case and advice of RBI, weakness of weak bank will grow until RBI adopts uniform rate regime to avoid unhealthy competition among public sector banks which are organ of same government and same RBI and same people of India. If United bank or Dena bank or Vijaya bank or any of 28 public bank suffer , it is people of India who really suffer .
Last but not the least, when profit and profitability of banks fall down due to political reasons or due to fault of bank management , it is bank staff who have to suffer in wage hike. During last talk , FM had expressed inability to accept wage hike demand made by trade unions only because bank could not afford such hike in their view.
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RBI Guidelines to be issued
Banks have to adapt the uniform marginal cost of funds methodology for Base rate.
The banks in India set their lending rates on loans and advances with reference to ‘Base Rate’ which is computed on the basis of the cost of funds to the bank. The Base rate system was introduced by the banks on July 1, 2010. However, the method of computing Base Rate was followed by different banks in different methods like ‘Average Cost Funds’, ‘Marginal Cost Funds’, ‘Blended cost of funds (li...abilities)’.
The Reserve Bank today (September 1, 2015) proposed a uniform marginal cost of funds methodology for all the banks, for calculation of their base lending rates. The apex bank has shown its faith in the marginal cost of funds as it appears to be more sensitive to changes in policy rates compared to other methods. The new guideline now proposed by RBI is in line with the monetary policy announced on July 1, 2015, and renewed on August 4, 2015. The banking regulator said that for effective transmission of its policy rates, the lending rates should be sensitive to the policy rates and linked to the policy rates. According to draft guidelines presented today , the Reserve Bank said that it would encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate’ and called for comments/feed back on before September 15, 2015.
The marginal cost of funds is computed taking into account of all sources of funds excluding equity. The cost of deposit is calculated as per latest interest rate/card rate of term deposits on various maturity and cost of maintaining CASA (Current accounts and Savings Bank account).The cost of borrowing is computed on the basis of average rates (based on proportionate balance) at which funds were raised for the last one month.
We may recollect here that at the last monetary policy review on August 4, RBI Governor Dr. Raghuram Rajan criticised the banks for not passing on the entire benefits of its 75 bps rate cuts since January 2015, the lenders have reduced base rate only by about 30 bps, citing higher cost of funds.
I am very happy that RBI has now suggested that bank must move to marginal cost for new base lending rate , instead of giving generalised instruction to all weak and strong banks. Whatever be the case and advice of RBI, weakness of weak bank will grow until RBI adopts uniform rate regime to avoid unhealthy competition among public sector banks which are organ of same government and same RBI and same people of India. If United bank or Dena bank or Vijaya bank or any of 28 public bank suffer , it is people of India who really suffer .
Last but not the least, when profit and profitability of banks fall down due to political reasons or due to fault of bank management , it is bank staff who have to suffer in wage hike. During last talk , FM had expressed inability to accept wage hike demand made by trade unions only because bank could not afford such hike in their view.
__________________________________________________________
RBI Guidelines to be issued
Banks have to adapt the uniform marginal cost of funds methodology for Base rate.
The banks in India set their lending rates on loans and advances with reference to ‘Base Rate’ which is computed on the basis of the cost of funds to the bank. The Base rate system was introduced by the banks on July 1, 2010. However, the method of computing Base Rate was followed by different banks in different methods like ‘Average Cost Funds’, ‘Marginal Cost Funds’, ‘Blended cost of funds (li...abilities)’.
The Reserve Bank today (September 1, 2015) proposed a uniform marginal cost of funds methodology for all the banks, for calculation of their base lending rates. The apex bank has shown its faith in the marginal cost of funds as it appears to be more sensitive to changes in policy rates compared to other methods. The new guideline now proposed by RBI is in line with the monetary policy announced on July 1, 2015, and renewed on August 4, 2015. The banking regulator said that for effective transmission of its policy rates, the lending rates should be sensitive to the policy rates and linked to the policy rates. According to draft guidelines presented today , the Reserve Bank said that it would encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate’ and called for comments/feed back on before September 15, 2015.
The marginal cost of funds is computed taking into account of all sources of funds excluding equity. The cost of deposit is calculated as per latest interest rate/card rate of term deposits on various maturity and cost of maintaining CASA (Current accounts and Savings Bank account).The cost of borrowing is computed on the basis of average rates (based on proportionate balance) at which funds were raised for the last one month.
We may recollect here that at the last monetary policy review on August 4, RBI Governor Dr. Raghuram Rajan criticised the banks for not passing on the entire benefits of its 75 bps rate cuts since January 2015, the lenders have reduced base rate only by about 30 bps, citing higher cost of funds.
RBI official asks banks not to use government capital to clean books-DNA-01.09.2015
A senior Reserve Bank official on Monday said state-run lenders should use the capital received from the government to grow their credit books rather than clear their large pile of bad assets.
"The banks should not be looking at the capital from the government to meet the risks. I think it must be to grow the balance sheet," RBI executive director N S Vishwanathan said in a conference organised by the industry lobby Assocham here.
State Bank of India's managing director for compliance and risks, Rajnish Kumar, agreed that the fresh capital should be ploughed in for credit growth which helps the economy.
RBI releases draft guidelines to calculate policy rates-Money Control
Reserve Bank of India, on Tuesday, released draft guidelines of new formula to calculate policy rates to ensure that policy rates are passed on to the customers by banks as the earliest.
Reserve Bank of India, on Tuesday, released draft guidelines of new formula to calculate policy rates. This has been done to ensure that policy rate cut benifits are passed on to the customers by banks as the earliest.
It will sync lending rates by banks and policy rates. Central Bank has asked banks to consider marginal cost of funds to calculate individual lending rates.
RBI has asked banks to submit a roadmap within two months before releasing the final circular. RBI has also asked banks to submit their opinions and feedback.
It will sync lending rates by banks and policy rates. Central Bank has asked banks to consider marginal cost of funds to calculate individual lending rates.
RBI has asked banks to submit a roadmap within two months before releasing the final circular. RBI has also asked banks to submit their opinions and feedback.
| Date : Sep 01, 2015 | |
| RBI seeks comments/feedback on Draft Guidelines on Computation of Base Rate based on Marginal Cost of Funds methodology | |
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