Base Rate not aligned to market:
Banks are not allowed to lend below the set Base rate, which is at range between 10.00-11.5%. Base rate is supposed to be relevant for application for AAA credit risk for tenor upto 6-12 months. Base rate is derived from average cost of 6-12 month deposit rate + statutory cost + allocated operating cost + standard credit cost provision. As obvious, Base rate does not cover credit-loss provision for high-risk credit (excluding Gilts, top-notch AAA credit and adequate security from liquid assets), tenor premium beyond 6-12 months and adequate return on asset/capital. When 6-12 month deposit rates are down at 8.5% and statutory cost are at minimum against adequate return from SLR, the Base rate pressure is from operating cost inefficiency. Be that as it may, resultant outcome is that Bank's base rate is not competitive to market reality, thereby shifting the financial intermediation to non-bank lending/investment entities.
Deposit-Credit growth not reflective of reality!
There is shift of credit demand from Banks to non-bank entities from good credit borrowers. The high term loan and cash credit lending rates of Banks are not to their liking. Most good credit risk borrowers are able to shift term loan and Cash Credit borrowing with CP/NCD debt products with Mutual Funds/Asset & Wealth Management companies, non-bank Financial Institutions, Provident & Pension funds and cash rich individual & corporate entities. This leads to flight of deposits & advances from Banks to non-bank financial intermediaries. So, the deposit & credit growth as shown in the system is not reflective of reality. The irony is that Bank deposits are fed into these non-bank financial entities for step-down financial intermediation. In reality, Bank's term loans portfolio is loaded with high credit risk borrowers and Cash Credit limits remain undrawn, being used to issue CPs & short term NCDs, while Banks are unable to price Working Capital linked Demand Loan (as alternate to Cash Credit) below the Base rate.
What is the remedy? Should Base Rate linkage be removed?
RBI intent is to establish transparency in credit pricing; but when it leads only to inefficiency, it is high time to find resolution! Banks prefer high base rate to avoid fine credit pricing across the segment of borrowers. It becomes worse when the system gets into abundant liquidity mode against squeeze in credit demand. Banks are under tremendous pressure to retain NII/NIM against severe cost pressure from non-bank competitors and holding good chunk of deposits at zero/negative spread with RBI as excess SLR. There is no quick-fix resolution when it is not easy to balance survival of non-bank financial entities against setting up of level playing field between bank and non-bank financial entities.
Thinking aloud for RBI to work on win-win resolutions to Banks, non-bank Financial Institutions and depositors; needless to say, worst hit are depositors and Banks!
Moses Harding
It is a joke when you say depositors are hit.
ReplyDeleteDepositor are royallly screw to benefit corporates like you for the past 10 years and we were getting negative returns to benefit YOU. Now in th past year only we were getting positive 1.6 measly return. but then already you are with complaint list.
Go and take the loan from NBFC and why preach to banks and please dont spoil financial system to benefit corporate crooks....
The country is running on Real estate engine and I know why all the corporate crooks are trying to save Real estate..