SBI to RBI: Banks should have freedom to decide on how to price lending rates

Country’s largest bank, State Bank of India has said that the Reserve Bank of India should do away with the current practice of directing banks on how they should price their lending rates, instead it should be left on the market forces. As of now, the RBI prescribes a formula to arrive at lending rates also known as MCLR or marginal cost of lending rates. This formula factors in the cost of funds and operational cost of the bank on deciding the floor rate at which banks could give loans.

Soon after the RBI announced the policy, P K Gupta, managing director of State Bank said, “MCLR formula is binding hands of banks, ultimately competition should be driving the rates. As there is flexibility on how banks can price their deposit rates, similarly banks should be given flexibility in pricing lending rates.”

Announcing last policy before demitting office, Rajan said that he was disappointed that banks have passed only a modest rate cut to borrowers despite ample liquidity in the system and 150 basis points reduction in policy rates since January 2015.

“Banks have been unfairly blamed for not passing on the rate cut. Bulk of the funds are deposits. Unless they are able to reduce deposit rates there is no way that banks can pass on the rate cut to borrowers,” said Gupta.