EDITORIAL DISCUSSION 21st June unacademy THE HINDU
The abrupt end of an unlikely alliance Transmission troubles: on inefficient banking system new nor undestrable banking system inefficiencies S. UBHODEEP
EDITORIAL DISCUSSION 21st June unacademy THE HINDU
Context: RBI continues to remain unable to influence the effective lending rates in the economy. In its latest statement of intent to resolve poor monetary transmission, the RBI said it would instruct banks to switch base rate customers to the marginal cost of funds-based lending rate (MCLR) system from April 1, 2018. In April 2016, it had introduced the MCLR regime, scrapping the base rate regime, in place since 2010 UBHODEEP
MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR Currently, under the base rate system, the lending rate at State Bank of India is 8.7%. The one-year MCLR rate is just 8.25%. This difference of 45 basis points could make a significant difference in borrowing costs Helpful especially for smaller firms and retail consumers relying on equated monthly instalments. UBHODEEP
Base Rate MCLR Rate Frequency of revision is onceFrequency of revision is in a quarter. monthly. Base Rate-Cost of Fund+Margin+Operating Expenses+CRR MCLR Rate-Marginal Cost of Funds+CRR+Operating Cost+Tenor Premium Marginal Cost of Funds arrived at based on the Cost of Fund arrived at based on the cost of old deposits CURRENT cost of deposits Margin is separately Margin is part of the Marginal calculated Cost of Funds Interest rate for you Base Interest rate for you MCLR Rate+Spread Rate+Spread UBHODEEP
RBI's assessment a large proportion of outstanding loans and advances continues to be linked to the base rate system. This perhaps triggered the RBI's February statement. Why ?? banks' reluctance to switch to the lower MCLR-based rates. Multiple pressures they face: Record levels of non-performing assets and losses, Significant treasury losses. UBHODEEP
RBl study Public sector banks could take a 40,000-crore hit on revenue if they allow all base rate borrowers to switch to the MCLR rate. But this creates an unfair situation as new borrowers get MCLR rates while the older ones continue on the higher base rate system. System not too different from the previous attempt by the RBI eight years ago to influence transmission by shifting to base rates from what was called a Benchmark Prime Lending Rate regime. UBHODEEP
The abrupt end of an unlikely alliance Trauma at the border S. UBHODEEP
OAs part of its "zero-tolerance" approach to dealing with undocumented migrants, the Donald Trump administration in the U.S. has been separating parents and children within migrating families. ODeep concern about the ethics of using children, facing trauma from separation from their parents, to discourage further undocumented border crossings. Loopholes" in legislation are two legal provisions: a law against "improper entry by aliens" Trump administration's zero-tolerance approach, all undocumented migrants are charged in criminal courts. UBHODEEP
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