After reviewing that the cuts in policy rates have not been passed on to the borrowers, RBI decides to make the benchmark prime lending rate more transparent.
Over the past six months, the central has cut the repo rate and cash reserve ratio (CRR) by 425 and 400 basis points respectively but yet the banks have only lowered their benchmark prime lending rate (BPLR) by only 50 to150 basis points during the same period.
On its annual monetary policy review, RBI said, "While the response to policy changes has been faster in the money and government securities markets, there has been concern that the large and quick changes effected in the policy rates by the Reserve Bank have not fully transmitted to banks' lending rates." The central bank refers this as the weaker transmission of monetary policy.
However sources from the banking industry said that RBI's governor D Subbarao has been assured by the banks chiefs that the monetary transmission was occurring effectively as almost 75% of the bank loans are extended at sub-PLR rates. This was also revealed through the RBI's policy document that states the average yield on bank loans to be around 10.9% in FY 09 against 12.3% in FY 08.
Meanwhile some bankers pointed out that the policy transmission issue was only raised when the interest rates came down. "When interest rates were moving up last year, banks were under pressure from finance ministry not to raise lending rates. Monetary transmission should happen smoothly even when interest rates go up," said a bank CEO.
RBI proposes for a more transparent BLPR system and plans to constitute a working group for the same. The central bank recommends keeping the credit pricing more transparent. The working group would submit its report by the end of August 09 after consulting all the stakeholders.
The banking regulator believes that a more transparent pricing mechanism would increase the prospects for borrowers to negotiate on better lending rates. Presently the interest rates on bank loans are dependent on both the borrower's rating and his power to bargain for a better interest rate.
The policy transmission as far is only seen in the case of new borrowers who can avail loans at lower interest rates while the existing customers continue to struggle with the high interest rates.
For instance the special home loan scheme by SBI that offers home loans at 8% to only new customers. The old customers continue to give high interest rates on their home loans as SBI has not lowered its PLR since January 2009.