For benchmark rate, RBI panel shortlists three instruments

October 05, 2017

The Reserve Bank of India’s Study Group to review the marginal cost of funds based lending rate (MCLR) system has proposed that one of the three instruments — Treasury Bill rate, the Certificate of Deposit (CD) rate and the policy repo rate — can be selected as the external benchmark rate in order to ensure that borrowers, especially home loan customers, get the benefit of rate cuts by the central bank.
The Study Group, in its report, said the main challenge in using either T-Bill rates or CD rates as the benchmark is that the current level of market depth in the T-Bill and CD markets can make such benchmarks potentially susceptible to manipulation. Also, T-Bill rates may at times reflect fiscal risks which will automatically get transmitted to the credit market when used as a benchmark. CD rates also have their own limitations — high sensitivity to liquidity conditions, credit cycles and seasonality. The policy repo rate has the primary advantage that it is robust, reliable, transparent and easy to understand, it said.
After the adoption of an external benchmark from April 1, 2018, as recommended by the Study Group, banks may be advised to migrate all existing benchmark prime lending rate (BPLR), base rate and MCLR borrowers to the new benchmark without any conversion fee or any other charges for switchover on mutually agreed terms within one year from the introduction of the external benchmark, i.e., by end-March 2019, the panel said.
The RBI Study Group on the benchmark submitted its report on September 25, 2017.
The key findings of the study are: large reduction in MCLR was partly offset by some banks by a simultaneous increase in the spread in the form of business strategy premium ostensibly to reduce the pass-through to lending rates; there was no documentation of the rationale for fixing business strategy premium for various sectors; and many banks did not have a board approved policy for working out the components of spread charged to a customer. The Reserve Bank will take a final view on the recommendations after taking into account the feedback received until October 25, 2017.
Other steps
PREAPID INSTRUMENTS: The RBI has decided to rationalise the operational guidelines with a view to encouraging competition and innovation, and strengthening safety and security of operations, besides improving customer grievance redressal mechanisms.
SLR REDUCTION: As part of the transition to a liquidity coverage ratio (LCR) of 100 per cent by January 1, 2019, the RBI has decided to reduce the Statutory Liquidity Ratio (SLR) by 50 basis points from 20.0 per cent to 19.50 per cent of banks’ net demand and time liabilities (NDTL) from the fortnight commencing October 14, 2017.
PUBLIC CREDIT REGISTRY: A High-level Task Force on Public Credit Registry (PCR) will review the current availability of information on credit, the adequacy of existing information utilities, and identify gaps that could be filled by a PCR.
LEGAL ENTITY IDENTIFIER: The RBI has decided to make it mandatory for corporate borrowers having aggregate fund-based and non-fund based exposure of Rs 5 crore and above from any bank to obtain Legal Entity Identifier (LEI) registration and capture the same in the Central Repository of Information on Large Credits (CRILC).
FPI REVIEW: A detailed review of current regulations on FPI debt investment shall be undertaken to facilitate the process of investment and hedging by FPIs.
Reference:

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