Benchmarking will not have major impact on banks’ NIMs: Praveen Kumar Gupta, SBI

Praveen Kumar Gupta, MD, Retail & Digital Banking, SBI, in a chat with Mythili Bhusnurmath of ET Now discuss how RBI has decreed that all the retail loans, housing and auto loans will move to external benchmark if they are on the floating rate basis.

Edited excerpts:

There are two suggestions made by the RBI in part B of the monetary policy recommendation relating to digital banking. One is about having an ombudsman for retail digital transactions and the other is about extending the cover as far as retail digital transactions in terms of the liability of the customer. How far do you think these will go towards furthering the use of digital transactions and use of digital?

There has been a substantial growth in digital transactions particularly on the UPI side. We expect the digital transactions will continue to grow. There has been almost 400% growth in UPI transactions in the recent past on a year-on-year basis.


We already have the ombudsman scheme within the bank also. Most of the digital transactions go to our internal ombudsman. We already had one internal ombudsman, we are going to appoint one more who will take care of primarily the digital transactions.

The second point they made was regarding prepaid instruments. What Mr Kanungo said was that some of the prepaid instruments were not really covered by the existing limited liability circular which the RBI had issued and they are going to cover them also under this scheme.

As far as banks are concerned, all the digital transactions existing earlier are already covered by the limited liability circular which the RBI had issued. So for the banks there is no real impact on account of this.

The other issue which really affects the banks is the move to a common benchmark from 1st April. What RBI has stipulated today is all the retail loans and MSME loans will move to external benchmark. They have prescribed three or four external benchmarks that can be used. This includes the repo rate or the 91-day or the 182- day T-bill rates or external benchmark published FBIL.

What they have prescribed is that all the retail loans, housing loans, auto etc will move to external benchmark if they are on the floating rate basis. Other than housing, most of the other retail loans are already on fixed rate basis. They are not getting impacted but the housing loan will definitely get impacted and the MSME loans also will move to external benchmark. Banks will have to come up with what kind of external benchmark they will use and that is going to be a major change as far as the banks are concerned.

There also is the issue of whether you will have the same external benchmark for all loans or whether it will be free for you to choose which external benchmark to use in the case of retail consumers and which one to use in case of MSMEs. RBI has also said that a change will be allowed only when there is a change in the rating. Does this not show us rather naïve belief in the competence of rating agencies?

We still need to wait for the guidelines. As of now, they have announced that four benchmarks will be allowed actually. Already three are very clear. One is the repo rate or the 91-day or 180- day treasury bills and they say that any other which is published and we have to see what exactly would that be. They have said you can use the same benchmark for one asset class which means that for the different asset classes, different benchmarks can be used. But I would wait for the guidelines.

Only thing that it will do is bring about some uniformity in the way the banks fix the rates. Only the spread cannot be changed. You can continue to use the benchmarks but the spreads can be changed only when there is a change in the credit rating and that is what the current guidelines that they have issued today say. But we still need to see the detailed guidelines.

Given that on the deposit front, interest rates are fixed, you really do not have the flexibility that banks abroad have. Is the RBI trying to force through a kind of change before the market is ready for it and will it further hamper the flexibility of banks?

Yes it does to some extent but this is something which was coming. We already had a committee report and the draft report of RBI was already there; the draft guidelines were already there. If you look at how the market evolves, may be the banks will come up with more floating rate products.

But it is only a small portion of the book which is getting affected by it. There is a large portion of the book that is not getting affected. To begin with, the portion of the bank’s book which is getting impacted is very small and I do not really think that this will have a major impact as far as the banks’ NIMs are concerned.