- Tuesday 25 Feb 2020
RBI mandate on floating rate benchmark rates is credit negative for banks: Moody’s
Team Udayavani, Sep 10, 2019, 2:29 PM IST
New Delhi: The Reserve Bank of India mandating banks to link certain loans to the external benchmark-based interest rate from October 1 is credit negative to the lenders as it will limit their flexibility in managing risks, Moody’s Investors Service said on Tuesday.
Last week, the RBI had stated that banks are not satisfactorily transferring the cuts in policy interest rates to borrowers as it asked lenders to mandatorily link all new floating rate personal or retail loans and floating rate loans to micro, small and medium enterprises (MSMEs) to an external benchmark.
The central bank has so far this year cut interest rate by 110 basis points but lenders have transmitted only a part of it to borrowers in the form of a lower cost of taking loans.
“This is credit negative for India’s banks as it will limit their flexibility in managing interest rate risk,” Moody’s said in a statement.
This new external reference rate could either be the repo rate, three-month or six-month treasury bills, or any other benchmark market interest rate published by Financial Benchmark India Pvt Ltd, an entity that administers benchmark rates.
Banks will be free to decide the spread over the external benchmark. Subsequently, credit risk premiums may undergo change when a borrower’s credit assessment also undergoes a substantial change, as agreed upon in the loan contract, Moody’s said.
Furthermore, other components of spreads, including operating costs, can be altered once every three years.
It said banks currently benchmark floating rate loans against the marginal cost of funds-based lending rates (MCLR). With changes in lending rates aligned to changes in the cost of funding, banks are able to mitigate their interest rate risk.
“Under the new rules, this direct linkage between lending rates and funding costs will no longer exist. This will expose banks to asymmetrical movements in the cost of funding and loan yields, thus exposing them to interest rate risks,” it said.
Moody’s said that under the new regime, while the floating-rate loan book will get re-priced, only the non-CASA (current and savings accounts) deposits will see a re-pricing on deposits.
“This will cause volatility to banks’ net interest margins (NIMs), with NIMs rising when interest rates increase and declining when interest rates fall. This volatility in NIMs will translate into volatility in the overall profitability of banks,” it said.
Also, the lack of a single benchmark that can consistently and accurately capture the movement of interest rates in the economy will also cause volatility to banks’ NIMs, according to Moody’s Benchmark selection will be difficult and will cause inherent volatility to banks’ NIMs, it said.
“Banks’ funding requirements are dynamic. There are periods when a particular bank’s funding needs are high and it will readily pay higher than market rates, and vice versa. The new rules will impede the ability of banks to reflect such changes in funding costs of their lending rates as these will be linked to an external benchmark,” it said.
The new rules will be applicable only to new personal, retail and MSME loans. Therefore, the near-term impact will be mitigated as new loans will be a relatively small portion of banks’ loan books to begin with.
However, over time, most of the retail and MSME loans will transition to the new mechanism, Moody’s said adding this mandate will affect all rated Indian banks, although in varying ways. For banks with strong deposit franchises, the volatility in interest rates in the economy will have a bigger impact. For banks with comparatively weaker deposit franchises, the volatility of their own funding costs will have a bigger impact.
Mumbai: With mobile networks better or at par with anywhere else in the world, India has an opportunity to become a 'premier digital society', billion....
New Delhi: IntrCity by RailYatri on Monday said it has raised over Rs 100 crore, led by an investment by Infosys Chairman Nandan Nilekani. The roun....
Mumbai: Global tech major Microsoft on Monday, February 24 announced a partnership with SBI to train differently-abled people find jobs in the banking....
Bengaluru: Otis Elevator Co. announced on Monday, February 24 that it has been selected to provide 112 Gen2 elevators for the second phase of the Beng....
New Delhi: GAIL India Ltd, the country's largest gas utility, will invest Rs 1.05 lakh crore over the next five years to expand pipelines, lay city ga....
Jerusalem: Gaza militants resumed their intense bombardment of southern Israel on Monday, with some rockets slipping through Israel's Iron Dome defenc....
Colombo: Rohitha Rajapaksa, son of Sri Lankan Prime Minister Mahinda Rajapaksa, on Monday apologised for making distressing remarks on social media wh....
London: India will host the Commonwealth shooting and archery championships in January 2022 and the medals from the two events will be counted for "ra....
Paris: A Mona Lisa as puzzling as the smile of Leonardo da Vinci's muse made out of nearly 300 Rubik's Cubes - sold for nearly half a million euros a....
Mumbai: Maharashtra Chief Minister Uddhav Thackeray on Monday dismissed the opposition BJP's claims of "rift" among the coalition partners in the stat....