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Indian central bank panel seeks new rules for faster transmission of rate cuts

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Indian central bank panel seeks new rules for faster transmission of rate cuts

A panel created by the Reserve Bank of India found that banks did not follow the specified methodologies for calculating how much they can charge for loans and proposed new requirements to force banks to pass on the central bank's policy rates to consumers in a more efficient manner.

In a report released Oct. 4, the panel found that banks have been slow to pass on changes in the policy rates as "banks deviated in an ad hoc manner from the specified methodologies" for calculating the base rate and the marginal cost of the funds-based lending rate.

The panel, therefore, recommended that banks should remove arbitrary or discretionary components when they calculate the base rate. The methodology adopted by banks should be subject to a regulatory review, the panel said.

Banks must also adjust key criteria used in setting their lending rates every quarter instead of every year as it impedes the monetary transmission.

The central bank had introduced new rules for computing bank loans, which took effect in April 2016. The new method, which uses the marginal cost of funds-based lending rate to price bank loans, was meant to improve the transmission of policy rates.