New Delhi: After goading banks, without much success, to pass on full benefits of policy rate cuts to borrowers, Governor Raghuram Rajan Tuesday said the Reserve Bank will this week issue guidelines to determine base rates on a new methodology based on the marginal cost of funds.
This could pave way for EMIs on home and auto loans to fall. The base rate, the minimum benchmark rate below which a bank cannot lend, has made it impossible for banks to cheaply price corporate loans and charge more from retail borrowers.
Stating that the marginal cost of pricing makes the costs flow through into lending rates faster, Rajan said that "the intent is that banks would be able to make incremental loans on the marginal cost pricing while historical or legacy loans will be on the base rate. That's the intent as we go forward."
Also read: Bankers hint at lowering rates after Raghuram Rajan's push
As banks held on to higher lending rates even after the central bank had cut the repo rate twice till March this year, RBI in April suggested the marginal cost as the basis for calculating their base rate, much to the chagrin of bankers who said that the domestic market was not mature enough to adopt such a method as deposits are still priced higher.
News source: Zee News