Banks will have to follow new base rate calculation: Rajan

Mumbai: Reserve Bank Governor Raghuram Rajan on Tuesday said the RBI is looking into banks' concern over adopting the marginal cost-based base rate regime but made it clear the lenders will have to follow the new computation methodology.

On September 1, the regulator had put out draft guidelines on computation of base rate based on marginal cost of funds methodology. It had asked for comments on the draft.

The central bank today said the final guidelines on base rate calculation will be issued by the end of November.

"Our banks will have to move towards that, we cannot continue protesting," Rajan told analysts after the policy announcement.

"We live in a marginal cost world, we don't live in a average cost world because incremental loans are made in response to competition from market which don't have any memory."

He said banks are making loans based on the rates prevailing in the market at current points.

"Given that there are pressures on the banks to respond and you can see those pressures, I would say, in the incremental loans that they are making where interest rates are often more favourable than in the legacy loans that they have in the balance sheets, even though we would say that there should be no discrimination."

Rajan said banks have typically become used to reasonably slow moving base rate which gives them time to adjust the deposit cost before they adjust lending. He, however, said despite the slow moving base rate, banks have been quite fast in the cycle to adjust deposit cost downwards.

"The bottom line is the market pressures and the competitive pressures from fast moving bank like HDFC Bank would force other banks to move towards a more marginal cost based base rate."

Last month, HDFC Bank lowered its base lending rate by 0.35 percent to 9.35 percent, the lowest in the industry.

Rajan said banks have some legacy issues and the RBI is examining some of them. "We are looking at some of the bank's concern and we will think about how to respond to those concerns in way that moves the system forward."

The Governor said there is a need to move towards benchmarks that are set by the market rather than by the banks themselves.

"This is something that will be the next step of the marginal cost pricing," he added.