The RBI has introduced the new marginal cost of lending rate (MCLR) methodology for setting interest rates since April, which takes into account the cost of funds by banks both from deposits as well as market borrowings.
Patel said it is hoped that the new methodology will lead to a better regime. “I agree that the transmission to bank borrowers has been less than what anyone of us would have liked it to be. And we are hoping that over the next quarter or two, also keeping in mind that the government has also reduced the small savings rate and the MCLR calculation itself will throw up more transmission,” Patel said.
Transmission of interest rate cuts by banks has not been up to the mark despite the 150 basis points rate cut by the Reserve Bank of India (RBI) since January 2015 but the central bank hopes the recent cuts in small savings rates will lead to lower deposit rates and ultimately will reduce borrowing rates,
In its biannual monetary policy report released along with the policy on Tuesday, the RBI said fixed rates on savings account deposits, sticky small savings rates, stressed asset quality of banks and sluggish demand for bank credit are impeding transmission of interest rates.
Between January 2015 and March 2016, the RBI reduced its benchmark repo rate by 125 basis points, public sector banks on an average reduced their base rate by 55 basis points and private sector banks have cut their rates by 50 basis points. So far this fiscal, in the new MCLR regime, public sector banks have reduced their base rates by 15 basis points on an average while private sector banks have reduced their rates by 25 basis points.
But bankers say the new regime should be given more time. “We should give it at least six more months to see how it works,” said NS Venkatesh, executive director, Lakshmi Vilas Bank. “The impact of MCLR is happening but it is too small to draw any attention. Partly, one of the reasons is that deposit growth is at the slowest in a decade. We should wait till at least March 2017 before we judge this system.