RBI Governor announces marginal cost pricing of credits from April-1

New Delhi, Feb 5 (KNN)  Addressing a tele-conference after the bi- monthly policy announcements,  RBI Governor, Raghuram Rajan has reiterated that marginal pricing of credits will be in place with effect from April 1, 2016.

On a query regarding transmission of the two consecutive lowering of the policy rates by RBI, he mentioned that with the implementation of marginal pricing the cost of credits will come down.

In December 2015, while announcing the bi- monthly policy Rajan had also mentioned that the biggest contribution to transmission will probably be the change to marginal cost pricing from April 1st.  This would be a direct contribution to credit.

In simpler terms, RBI has insisted on the Bank to offer new loans at the rate of current deposit rates, which are bound to move down with the previous decrease in RBI rates and not to fix the interest rates by averaging the cost of old deposits, which were offered at higher rates and the current, lower, deposit rates. This will depend largely on how the Banks manage their old advance and particularly the non-performing assets, whose write off will put further cost burden on the Banks.

However, the RBI Governor and his team were at pains to explain how the existing high rate for Government Bonds is going to help in transmission of the reduction of the policy rates by RBI to the borrowers.

Bond rate are the safe rate of return at which Banks invest in Government securities and if it remains high, how the rates for more ‘risky’ corporate loans will come down, is a big question.

Needless to mention the situation will remain tougher for the poor MSMEs (micro small and medium enterprises) who are taken to be more risky to finance.  This in spite of the  importance of the MSME sector, highlighted by RBI Deputy Governor, S S Mundra, in a recent speech.

“There is growing realization that if the country has to move to a higher growth trajectory, then MSME sector needs to play a central role.  They not only employ a large number of unskilled and semi-skilled people but also support large industries by supplying raw material, basic goods, finished parts and components”, Mundra had said on the occasion.

Answering another question as to whether RBI will allow the rupee to depreciate further against the US dollar to counter the Yuan depreciation, Rajan said, “I can just repeat our “mantra” which we actually follow that we intervene in case of excessive volatility but not to try to maintain a level or a rate of depreciation against other currencies”.

Whether like the policy rate reduction, the RBI dictum on marginal pricing will also be washed out by the public sector Bank, needs to be watched. (KNN Bureau)