Editorial - June 21 - 2018

Transmission troubles: 

An inefficient banking system 

Customers of Indian banks continue to foot the bill for banking system inefficiencies

The idiom foot the bill means - to pay all the costs for something

The example in a sentence

We ended up having to foot the bill for a new roof because our insurance didn't cover storm damage

The Reserve Bank Of India continues to remain unable to influence the effective lending rates in the economy. 

In February, in its latest statement of intent to resolve poor monetary transmission, the RBI said it would instruct banks to switch base rate customers to the (MCLR) system from April 1, 2018.

MCLR vs Base Rate

Introduction of MCLR: April 2016  by Scrapping Base Rate System

Notable Reasons 

MCLR is more sensitive to policy rate signals

    MCLR Supposed to push banks to lower lending rates

Rate Of Interest under MCLR and Base Rate System

Currently, Rate pattern at SBI

Base Rate System: 8.7%

One Year MCLR: 8.25%

Base Rate System > Marginal Cost Of Lending Rate [ 45 Basis Points]

Why now in news?

In the RBI’s assessment, "a large proportion of outstanding loans and advances continues to be linked to the base rate system" This perhaps triggered the February statement. The RBI, which has often faced flak for poor monetary transmission, shouldn’t be swayed by these concerns

Banks Behaviour towards RBI's Policies

The banks’ reluctance to switch to the lower MCLR-based rates, because of the following reasons

1. Record levels of non-performing assets and losses, and significant treasury losses.

2. Revenue loss because of lowering of interest rates [ MCLR < Base Rate ]

Background :

An RBI study estimates that public sector banks could take a ₹40,000-crore hit on revenue if they allow all base rate borrowers to switch to the MCLR rate.

Continuing under Base Rate System leads to unfair Situation

New Borrowers will get a loan under MCLR System 
Old Borrowers will be continued under Base Rate System [ Under Pain of paying more money ]

Conversion comes at a cost

While a base rate customer can shift to the MCLR regime only by paying a fee, This outcome is not too different from the previous attempt by the RBI eight years ago to influence transmission by shifting to base rates from what was called a Benchmark Prime Lending Rate Regime.

Conclusion

Given the need to revive the economy through consumption and fresh investment, this impasse [a situation in which no progress can be made or no advancement is possible ] needs to be broken.

Additional Information to be analyzed

1. Reserve Bank Of India [Formation, Objectives, Purpose ]

2. Marginal Cost Lending Rate [ Components ]

3. Base Rate Components 

4. Why MCLR is better than Base Rate [ Why RBI instructions are overridden too often by banks - Is RBI acting as a puppet ? ]

5. It's Impact on the economy - Pls comment below