Aesop's fable revisited in banking sector

Not so long ago, there was a grassland controlled by a group of foxes. These foxes imposed monthly rent on all grass-eating animals, such as sheep and goats. When there was a drought, the rent was promptly jacked up, and the grass-eating animals had no option but to pay. Conversely, when there were good rains and grass was aplenty, the foxes came together and continued to charge a higher rent. Frustrated, the grass-eating animals complained to the king – Lion. 

When the lion asked the foxes about it, they admitted to their deed. But they justified it by saying that other animals (not the grass-eating ones) were stealing their grass, and thus they could not afford to bring down the prices for the grass-eating animals who were docile and paid without any protest. The lion was sympathetic towards the ‘plight’ of the foxes. But he had to appear fair to the goats and sheep as well. So, the lion decreed that the foxes will have to be completely fair, and drop rentals in future. 

But then, calamity fell. The lion was replaced as king by another one. The foxes sensed an opportunity to delay the matter further and approached the new king. The new king was also sympathetic to the foxes’ so-called plight and said that a final decision on the dropping of rentals would be taken at a future time. 

 

This, in short, is the story of the Reserve Bank of India (lion), banks (foxes) and grass-eating animals (home loan and small and medium enterprise customers). The report of the Internal Study Group to Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System (chairman Janak Raj) released on October 4, 2017 for public feedback, had recommended the use of external benchmarks by banks for floating rate loans, instead of the present system of internal benchmarks like Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR). 

As a step in that direction, it was proposed that all new floating rate personal or retail loans and floating rate loans to micro and small enterprises extended by banks from April 1, 2019 shall be benchmarked to one of the following – RBI policy repo rate, or  Government of India (GoI) 91-day Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or GoI 182-days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.

However, RBI’s new Governor Shaktikanta Das said in a press conference on February 7 that “the discussion paper or draft guidelines, they were placed in the public domain on these external benchmarks. We have got a lot of comments from the public as well as from the banks, and they are currently under examination.” 

Now, when the apex bank, under the earlier governor, had already prescribed a deadline for the implementation of new benchmark rates from April 1, what is left to be discussed? At best, the benchmark needs to be finalised. Are we staring at more delays? 
The writer is a Sebi-registered investment advisor


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