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Last updated: 17 Oct, 2017  

Rupee.9.Thmb.jpg Exposed: Banks behind unfairly high cost of credit

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Bikky Khosla | 17 Oct, 2017
The Reserve Bank of India, in its fourth bi-monthly monetary policy review early this month, kept rates on hold, citing inflation concerns, a decision which according to India Inc, failed to take into account the unduly high interest rates that the industry is currently burdened with. It happens almost all the times. Whenever the central bank cuts the repo rate, the move is hailed and when it does not, an uproar follows. But a recent study report, interestingly prepared by an internal study group of RBI itself, points to a far more serious issue--commercial banks keep lending rates artificially high and this practice has turned out to be "deleterious" to retail and SME borrowers, even in an easy monetary cycle.

The report has found that banks, both public and private, purposefully deviate from the specified methodologies for calculating the base rate and the MCLR to either inflate the base rate or prevent the base rate from falling in line with the cost of funds. These "ad hoc adjustments" include inappropriate calculation of the cost of funds, no change in the base rate despite significant fall in the cost of deposits, sharp and out of tune increase in the return on net worth to offset the impact of reduction in the cost of deposits on the lending rate, and inclusion of new components in the base rate formula to adjust the rate to a desired level. These explosive revelations, though written in a mild, semi-academic tone, are contained in the 'Executive Summary' section of the report.

The findings also suggest that while banks are keen to keep most of the gains of RBI rate cuts with themselves, they pass on the policy rate hikes quickly to borrowers. Citing an example of this, the report mentions that pass-through to outstanding loans from the repo rate was around 60 percent during the tightening phase (July 2010 to March 2012), while it was less than 40 percent during the subsequent easing phase (April 2012 to June 2013). In other words, customers were deprived of 60 percent of the benefit, which according to an estimate, may amount to tens of thousands of crores, during the span of those 15 months only.

And banks have continued to do this probably for decades. In fact, the report itself admits that the issue has all along been a matter of concern to address which RBI has refined the interest rate setting methodology of banks from time to time. It introduced the PLR system in 1994, the BPLR system in 2003, the base rate system in July 2010, and the current MCLR system in 2016, but the experience, as the above statistics reveal, is still far from being satisfactory. So, the central bank's study group has now put forth a new set of recommendations, but only time will say if RBI will be able reverse the situation.

I invite your opinions. Wish you all a very happy Diwali.
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It's robbery
Prasad | Fri Oct 20 15:35:38 2017
Sir, you have mentioned it correctly , how SMEs are being fleeced, First of all SMEs are short-funded and those funded were paying high cost , usually , they keep at high risk account and give them a feeling that they are doing super help.Government must seriously look at funding SMEs liberally and at lowest possible rates.Irony is that , SME owner's can easily buy BMW car at lowest rate in a day , if same SME wants to buy a machine for augmenting capacity or an expansion , they have to run piller post to get one crore loan, collateral , rosy ratios and projections , 700 plus CIBIL ratings , IT returns , Service tax dues , 2% application fe deposit ,track records..... by then SME submits all that and gets loan sanctioned high risk rate , slow-down in market fell on face opportunities are lost , customers exited , eventually funded SME went into depression and got in the end NPA tag .

High cost of credit.
Umesh Mehta | Fri Oct 20 09:05:09 2017
Exposed: Banks behind unfairly high cost of credit is why Namo must permit new private and foreign banks here.

  Re: High cost of credit.
Prasanna Padmaraj | Tue Oct 24 07:23:34 2017
FOREIGN BANKS MIGHT BE THE WORST LOT.Banks like HDFC,ICICI which have foreign investors are fleeing customers.

Banks really are unfair
Kuldip | Wed Oct 18 13:04:54 2017
Banks are quick to pass on the benefits to the new customers but are they don't pass the benefit to the existing customers. RBI should make it compulsory to offer the same rate for new and existing client. Also there is one more fraud going on and that is Insurance linked to the Home Loans. The insurance offered by the banks are expensive and also act as barrier while transferring the loan to other bank. IRDA and RBI should ban bank from selling the insurance schemes which put restrictions on the customer

A.V. Chandran | Wed Oct 18 07:08:39 2017
Planning process and Continuous Review Mechanism towards banking process closely related to mission vision Credit whereas our mixed economy of macros and micros will have direct repercussions for the critical disbursement of Credit and corresponding impact on continuous Industrial production growth and shortfalls of inputs and outputs. The very solution is removal of minus margin and induction of plus margin. This process must be in place with reference to disbursement of actual credit requirement for smooth running of the unit supporting corresponding Working capital flow. For instance if Unit X is with a requirement of Rs.100 cr per month Working capital requirement, the bank must sanction credit to the tune of Rs.125 cr including plus margin of 25% and at the close of precise month the bank must be reported with the actual utilization of the limit wherein if it is fully utilized the next month disbursement will continue the same rate whereas it is below Rs.100 cr the credit disbursement will be with minus margin of 25% viz. Rs.75 Cr. This process will continue for the whole financial year subject to quarterly repayment and subject to 13% p.a. interest for timely repayment and 15% p.a. for irregular repayment. If this type of disbursement is through with reference to Working Capital and other development purpose subject to continuous review mechanism it will receive best attention for continuous positive results.

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