Indian central bank's push for rate cut resisted

Banks cite cost mismatch as reason to reject RBI's planned regulation of cutting home loan rates.

At the meeting of CEOs of large banks and senior RBI officials to suggest possible measures that the central bank could consider for the 29 January 2010 monetary policy, RBI deputy governor KC Chakrabarty reminded bank chiefs that the regulator had earlier addressed its concern over banks' inability to pass on the benefit of lower interest rates uniformly to all customers.

According to a report in the Economic Times, bankers present in the meeting argued that since the incremental cost of fund had softened, they could charge lower rates only to new customers while old customers had to pay more as old funds were raised at a higher cost.

Countering this, the regulator said reduction in incremental cost of funds also brings down the average cost of fund for a bank which should then be in a position to offer the new, lower lending rate to old as well as new borrowers.

Some bankers said offering the same rate to all could spark legal feuds since interest spreads (over or below the PLR) varied from customer to customer, each of whom sign separate loan contracts with banks, while some took the opportunity to spell out how their finances could come under strain.