Business
RBI norms to affect bank's pricing power: Moody's
Chennai, Jan 26
The Reserve Bank of India's
(RBI) norms requiring banks to outline the framework they use to
determine the loan spread about their benchmark lending rates will
reduce pricing power of the latter, global rating agency Moody's
Investor Services said Monday.
An article in Moody's Credit
Outlook Jan 26 said: "The new requirements are credit negative because
they will reduce banks' discretion to price loans at higher spreads to
correspond to market conditions and each borrower's credit worthiness."
The
norms are likely to most affect consumer loan pricing given that retail
borrowers tend to have less pricing power than large industrial
borrowers and banks have been most able to take advantage of market
inefficiencies in the retail loan segment, Moody's said.
According
to the report, within the retail segment, pricing in the mortgage
segment is likely to be the most affected as it is in this segment that
banks have resorted to differential pricing the most.
Indian
banks are required to set a base lending rate that is a function of the
bank's cost of funding, operating costs and cost of capital.
"Although
banks are not allowed to lend at rates below their base rate, they have
latitude in how they charge a premium or spread on individual loans,
depending on market conditions and the credit quality of the specific
borrower," the report stated.
According to Moody's, RBI's concern
about the transparency and fairness of how banks determine loan spreads
mainly relate to the downward stickiness of lending rates (i.e.,
lending rates not declining commensurately with other interest rates),
discriminatory treatment of old borrowers versus new borrowers and
arbitrary changes in spreads.
Bank spreads are a function of
product-specific operating costs, credit risk premium, the loan tenor
and qualitative factors such as competitive intensity and pricing power.
"The
regulator has been concerned that arbitrary inclusion of these
qualitative factors into product pricing can lead to spread disparities
among customers. The new norms address this by requiring banks to have a
board-approved policy delineating the spread components," the report
noted.
"We expect this to reduce the arbitrariness in determining spreads for specific customers," Moody's said.
According
to the rating agency, the spread charged to an existing borrower may
not be increased except on account of deterioration in the borrower's
risk profile or when market interest rates for that particular loan
tenor have increased.
If a bank decides to change its spreads
because of a change in market interest rates for a particular loan
tenor, the change will also be applied to all the bank's borrowers at
that particular tenor, Moody's said.