Topic Of The Day:-“ransmission Troubles: On Inefficient Banking System“
The RBI continues to remain unable to influence the effective lending rates in the economy. In February, 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. “Since 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,” it had said. This was supposed to push banks to lower lending rates. 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, especially for smaller firms and retail consumers relying on equated monthly instalments. In the RBI’s assessment, a large proportion of outstanding loans and advances continues to be linked to the base rate system. This perhaps triggered the February statement. Yet, the RBI is yet to operationalise that intent. One can understand the banks’ reluctance to switch to the lower MCLR-based rates, given the multiple pressures they face, including record levels of non-performing assets and losses, and significant treasury losses. The RBI, which has often faced flak for poor monetary transmission, shouldn’t be swayed by these concerns. An RBI study estimates that 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. The RBI, which has just allowed banks to spread the booking of losses on the treasury front over four quarters — after talking tough about such rollovers — may not want to hurt them more. But this creates an unfair situation as new borrowers get MCLR rates while the older ones continue on the higher base rate system. While a base rate customer can shift to the MCLR regime only by paying a fee, this outcome is 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. There was no sunset clause included then. For troubled banks, this is an asset-liability mismatch issue. Given the need to revive the economy through consumption and fresh investment, this impasse needs to be broken.
MEANINGS AND WORDS
1) Intent
Meaning: Intention or purpose.
Example: “with alarm she realized his intent”
Synonyms: Aim, Purpose
2) Scrapping
Meaning: Abolish or cancel (a plan, policy, or law).
Example: “he supports the idea that road tax should be scrapped”
Synonyms: Abandon, Drop
Antonyms: Keep, Restore
3) Harmonise
Meaning: Make consistent or compatible.
Example: “plans to harmonize the railways of Europe”
Synonyms: Coordinate, Correlate
4) Relying on
Meaning: To need a particular thing or the help and support of someone or something in order to continue, to work correctly, or to succeed.
Example: The success of this project relies on everyone making an effort.
5) Outstanding
Meaning: Not yet paid, resolved, or dealt with.
Example: “much of the work is still outstanding”
Synonyms: Undone, Neglected
Antonyms: Complete, Paid
6) Triggered
Meaning: (of an event or situation) cause (someone) to do something.
Example: “the death of Helen’s father triggered her to follow a childhood dream and become a falconer”
7) Operationalise
Meaning: Put into operation or use.
Example: “such measures would be difficult to operationalize”
8) Reluctance
Meaning: Unwillingness or disinclination to do something.
Example: “she sensed his reluctance to continue”
Synonyms: Unwillingness, Disinclination
Antonyms: Willingness, Eagerness
9) Flak
Meaning: Strong criticism.
Example: “you must be strong enough to take the flak if things go wrong”
Synonyms: Criticism, Censure
10) Swayed
Meaning: Control or influence (a person or course of action).
Synonyms: “he’s easily swayed by other people” Example:
Antonyms: Influence, Affect
11) Treasury
Meaning: The funds or revenue of a state, institution, or society.
Example: “she transferred billions from the national treasury to her personal bank account”
Synonyms: Purse, Bank
12) Rollovers
Meaning: The extension or transfer of a debt or other financial arrangement.
Example: “investments would be returned after four months unless a rollover was requested”
13) Sunset clause
Meaning: Part of a law or contract that states when it will end, or the conditions under which it will end.
Example: A sunset clause in the bill called for the tax cuts to expire in 2010.
14) Impasse
Meaning: A situation in which no progress is possible, especially because of disagreement; a deadlock.
Example: “the current political impasse”
Synonyms: Deadlock, Stalemate
