RBI deputy governor: rate cuts benefit must be passed to existing borrowers

The newly-appointed Reserve Bank of India deputy governor KC Chakrabarty has pointed out that the existing borrowers should also get the benefits of the reduced interest rates. He said the same rates should be charged from the existing borrowers with floating rate loans as being charged from the new borrowers.

In an interview to ET soon after taking the charge, Mr Chakrabarty said: “A bank cannot offer differential rates for old and new customers if both have floating interest rate.” He stated the same rate should be charged from the old and new customers in line with international best practices.

Generally, banks have always extended better terms for new borrowers by varying the spread between the interest rate on the loan and the benchmark prime lending rate (BPLR). Expressing their views in favor of this flexibility bankers say that it is easy to pass on the benefit of lower incremental cost of funds to new customers as they do not have to wait for their portfolio costs to come down. It will not be possibe for them to launch any special scheme if the banks are forced to match rates for existing and new borrowers. Earlier KJ Udeshi, chairperson, the Banking Codes and Standard Board of India, had also indicated that benefits of any reduction in interest rate costs should be passed on evenly to all borrowers.

Mr Chakrabarty’s comments have corresponded with the central bank proposal of appointing a working group headed by RBI executive director Deepak Mohanty to review the benchmark prime lending rate (BPLR) of banks and recommend changes to the present system to make credit pricing more transparent. BPLR is the reference rate to which all floating rate loans advanced by a bank, including floating rate home loans, are tethered to.

Informing the appointment of the working group, the central bank has said that in the current scenario BPLR has lost its relevance because most of bank loans are advanced below PLR.

The working group will also recommend loan pricing measures set up on international best practices. Along with other things, it will also analysis the administered lending rates for small loans up to Rs 2 lakh and for exporters recommend suitable benchmark for floating rate loans in the retail segment.

Mr Chakrabarty, pointed out there is a need for strengthening the law to ensure that retail customers are protected. “We not only have to ensure that rates are linked to a floating rate, but also ensure that this rate moves in tandem with other rates in the system.”