New loan pricing scheme may be put off

Prelims level : Economy – Banking Mains level : GS III - Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
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Banks will be getting more time to migrate to the new loan pricing regime which was scheduled to be implemented from April 1.

This new pricing scheme, based on an external benchmark, will be applicable for floating rate loans extended to individuals and small businesses.

During the December monetary policy review the last such review by former RBI Governor Urjit Patel the central bank had decided that all new floating rate retail loans such as housing and auto loans, and floating rate loans extended by banks to micro and small enterprises from April 1, 2019, should be linked to an external benchmark.

RBI also said that the final guidelines would be issued by December-end.

The final guidelines on the loan pricing based on external benchmark are yet to be released by RBI. Banks would need some time to prepare after the final norms are issued. So, it is likely to be postponed.

Various Benchmark Rates:

  1. Repo Rate:The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
  2. Reverse Repo Rate:The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
  3. Liquidity Adjustment Facility (LAF):The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of a range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve the transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
  4. Marginal Standing Facility (MSF):A facility under which scheduled commercial banks can borrow an additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
  5. Corridor:The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
  6. Bank Rate:It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
  7. Cash Reserve Ratio (CRR):The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
  8. Statutory Liquidity Ratio (SLR):The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
  9. Open Market Operations (OMOs):These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
  10. Market Stabilisation Scheme (MSS):This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

Monetary Policy Committee

  • It is the committee which will decide India’s Monetary Policy.
  • The formation of the monetary policy committee was mooted by the Urjit Patel committee.
  • The committee suggested that monetary policy be rule-based and not discretion-based. The final decision on monetary policy should not lie with the RBI governor alone but on a group of people.
  • Targeting inflation is to be the core objective of the central bank, and it will be answerable to law-makers if it failed to achieve the target.


Composition of MPC

MPC will be a 6 member committee:

  • 3 members will be from RBI. These 3 members would include the governor who will also be the ex-officio chairperson of the committee.
  • 3 members will be appointed by the central govt. These members should be  experts in the field of finance or banking or economics or monetary policy. They will have a tenure of 4 years and will not be eligible for reappointment.
  • The members appointed by the govt. will be appointed  based on the recommendations by the search-cum-selection committee which will be headed by the cabinet secretary.
  • Decisions will be taken by majority vote with each member having a vote
  • The governor will not enjoy a veto powerto overrule the other panel members, but will have a casting vote in case of a tie.
  • No government official will be nominated to the MPC

MPC will meet four times in 1 year and will announce its decisions publicly after each meeting. MPC replaces previous arrangement where RBI Governor along with a Technical Advisory Committee (TAC) taking decisions on monetary policy including setting interest rates. In the previous arrangement TAC was only having advisory functions and the RBI Governor enjoyed veto power over the committee in setting interest rates.

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