IBC resolutions and haircuts

POLICY RATES TRANSMITTED…….REALLY!

(Below created situations and conversations are purely imaginary; might or might not reflect reality; Intention is not to hurt anyone; if it hurts anyone, my sincere apologies to them)

Regulator to Banker:

Since 2019, we have reduced policy rates by 250 bps. Whether you have passed on the benefit to the customers? 

Banker:

Yes Sir. We have reduced the interest rates to our deposit customers.

·      On fixed deposits from 8.00 to 9.00 per cent in 2019 to 5.00 to 6.00 per cent now

·    Since repo rate is a daily rate impacting our call money and treasury bills rate, interest on demand deposit like savings is also reduced by 100 to 125 bps.

Thanks to the transmission, we could improve our NIM and also the net interest income. This comes in handy to improve our operating profit, as the income stream is constant and is on the decline during this COVID TIME

 Regulator to Government:

Sir, whether this helped you in your borrowing programmes?

 Government:

Not to the extent of reduction of policy rates. The 10 year G-Sec, which was ruling at 7.40 plus, is now at 5.80 plus. Reduction in interest outgo on borrowings helps the government, as the decline in tax and non-tax revenues are quite steep. Even with reduced interest rates, banks are willing to subscribe, since their cost of funds is less than 5.The rate is quite attractive as they will get only 3.35% only, if they choose to invest the surplus in reverse repo. We are tempted to borrow more at the prevailing rates.

Regulator to bank borrower:

Dear Esteemed, hope you have got the best interest rates now.

 Bank Borrower (New & existing):

The bank said they have reduced their repo rate linked lending rates (RPPL) for new loans last year.  After six months, I approached them for a new loan.  While the old loan was charged at 2.25% over the repo rate and got reduced along with the repo reduction of 25 bps, the new loan had no reduction.  They said, for the new loans, RPPL is charged at 2.5% over the repo rate. 

I also enjoyed loans linked to MCLR and I found that my loan is carrying the same rate of interest, though the bank reduced its MCLR, in between, by 100 bps. Incidentally, I noticed that the reduction in MCLR was not in line with the amount of reduction in the repo rate. When I enquired, I was told that as per agreement, the contracted rate applies and if I want to get the new rate, I should give a letter and pay a fee.  The formula for MCLR and RPPL are different and MCLR should not be compared with the reduction in repo. If I wish to move over to RPPL, I need to give a letter and accompanying fee again.

In some of the loan rates enjoyed by my friends, the reduction was not much.  The bank explained that one should look at factors like tenor of the loan, credit risk perceived from the bank’s point of view, credit ratings, CIBIL score, etc. as well when the loan rates are compared with repo rate reduction. 

On the whole, I respectfully submit Sir, I am really confused as to whether I got the benefit of reduced interest rate or not.

 Regulator to Bank Borrower:

We appreciate your concerns. Since beginning of this millennium, we are engaged in this issue of transmission of policy rates.  We prescribed prime lending rates (PLR) to the bankers. Then we implemented benchmark prime lending rates (BPLR). Since the interest rates became too low, we moved over to Base Rate with cost of funds as the anchor to arrive at Base Rate.  We were not happy with the results and implemented MCLR (marginal cost of funds based lending rate). Finally, we moved over to external benchmark linked rates to solve the issue.  We understand from our talks with you that there are still some teething problems. We will appoint an expert committee to come out with their recommendations as to whether internal and external benchmarks can be combined to arrive at lending rates for bank borrowers.  Hope you understand the situation. 

Bank Borrower: We understand your problems and also that our difficulties will not end soon. Thank you Sir

Senior Citizen Depositor to Regulator: I have a small issue. I am not a pensioner. I depend only on interest income. I do not enjoy standard deduction benefit on taxable income. I am more than 70 and do not qualify for life or health insurance. The drop down in interest rates is deep. Earlier the banks were offering interest rates 50 bps higher over the normal deposit rates, for senior citizens.  Now that is also reduced.  Every one says repo rate reduction is the cause for the reduced deposit rates, though we do not know what is the meaning of repo. Can you increase the repo rate next time so that we will get higher interest rates on our deposits

Regulator We do not have any guarantee that any reduction in repo rate will result in interest rate reduction for loan customers. In the same way, we are not sure whether any increase in repo rate will translate into higher interest rates for depositors (saying within 'though that will result in higher interest rates for borrowers'). We have to think next, as to what should be announced after 'on tap TLTRO' to maintain liquidity in the financial system for the benefit of the above three. (government, bankers, loan borrowers). We will certainly listen to you patiently, once normalcy is restored.  Till such time, kindly bear with us. Stay safe and please follow COVID guidelines issued by the government.

As the government and banker were waiting for the senior citizen to come out, to resume their discussions with the regulator in his chamber, I leave the scene quietly.

V. Viswanathan

 24^th October 2020.