RBI shouldn't force banks to lower rates

The RBI will soon come out with the final guidelines for calculating base rates under the new marginal cost of funds method. Base rate is the minimum lending rate that banks are free to set after fixing a spread over their total costs, which includes cost of funds. Earlier, banks could use either the average cost of funds or the marginal cost of funds method. Most adopted the former; this, according to RBI, has impeded quicker transmission of policy rate cuts to borrowers. When the RBI lowers its policy rate, banks trim rates only on new deposits. Under average costing, the cost of funds takes time to fall. Under marginal costing, the cost of funds will fall more quickly and may force banks to cut rates more sharply.

Forcing banks to reduce loan rates, however, seems retrograde. Given the weak credit offtake and growing pile of bad loans, banks are already finding it hard to maintain their margins.

The new method is likely to pressure margins further. The issue of transmission has been around for decades now. In an attempt to fix it, the RBI has been working with the rate structure for many years now. But not much has changed. Earlier, banks lent at sub-Basic Prime Lending Rate or their reference lending rates to avoid tweaking their benchmark rates.

Now banks prefer to tinker with the spread rather than the base rate. The RBI has already tweaked some norms for base rate calculations. But these efforts are only half the solution.

Instead of micro-managing banks, the RBI should increase retail participation in the bond market. A deeper bond market (where rates have fallen sharply) is necessary to ensure that rates flow seamlessly between markets.

Business Line

Banks, insurers keen on tying up with India Post

The e-mail may have replaced the snail-mail but India Post has survived the numerous obituaries written for it and become much sought-after once again on the strength of its unmatched network.

After being pursued by e-commerce firms for logistics and other support, the country’s oldest postal service provider is now being wooed by banks and insurance companies as it gears up for a debut in the payment banking business. The list of those keen to tie up with India Post includes marquee names like SBI, Bajaj Alliance, IDBI, YES Bank, HDFC and Axis Bank.

There are 17 such banking and insurance companies who have shown interest to use the postal network for delivering their services such as EMI collection and insurance.

According to government sources, these companies want to use the postal network by partnering with the India Post Payment Bank, which got licence from the RBI recently.

Sources close to the development toldBusinessLine that SBI could be the first bank to join hands with the Postal Department. “SBI chief (Arundhati Bhattacharya) and Kavery Banerjee, Secretary, Department of Posts, had a meeting recently and they discussed to work hand-in-hand for providing services to customers,” an official said.

Both the heads — of the largest bank and postal networks — discussed how they can leverage each other’s strengths and help extend financial services to the disadvantaged, the official added.

“There was a discussion also on how a postman can work as a bank agent in far-flung rural areas where neither a bank branch nor a bank agent can go for verification of loans. But with the Postal Department’s help, farmers and students can get loans (for agriculture/education) without much hassle,” the official said.

ATMs at post offices

The official said the government is also working towards banks installing ATMs at post offices; the Department of Posts has a network of 1.55 lakh branches across the country and more than 85 per cent are in rural areas.

But it is evident that the banks are gung-ho about tying up with the Postal Department as they will only stand to benefit. “This initiative will play a pivotal role in bringing a large number of uninsured segments of the country under the safety net and improving the penetration of insurance in the country,” said TA Ramalingam, Chief Distribution Officer, Bajaj Allianz General Insurance.

A tie-up with payment banks like The India Post will provide insurers an opportunity to distribute retail insurance solutions such as personal accident and health insurance policies to their huge customer base, he said.

“This will also enable insurers leverage on the payment bank’s strong distribution network to take insurance solutions to the unrepresented segments in the country, especially in tier-III cities and villages,” he added.

Business line