RBI have reduced repo rate three times by a total of 75 basis point in last 12 months but on an average banks were able to pass on to end borrowers only 20-30 basis points. This is mainly because of calculation of base rate by the banks, which is rate fixed by banks as per their structure of their balance sheet indicates minimum rate at which bank can offer loan to the borrowers that to prime customers.
Why RBI reduction in repo rate did not result in reduction in loan rates immediately??
RBI officials are of opinion that banks are seeking to protect their profit margins and they are not passing on the benefit immediately to the end user and economy is taking time to take any effect on ground level in least time.
The RBI earlier proposed that lenders start determining base rates using the so-called marginal cost of funds. Under this method, banks' lending rates would respond more quickly to money market rates now.
On Tuesday, the RBI unveiled the detailed draft guidelines on how banks should calculate their lending rates, and asked for feedback by Sept. 15. The central bank wants to implement the measures by beginning of coming year i.e. April, 2016.
"For monetary transmission to occur, lending rates have to be sensitive to the policy rate," the RBI said in the release.
Borrowers set to benefit with this policy change as once RBI reduce rates, banks with pass on immediately.