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Stage set for clarity in rates

Mumbai, Oct. 27: Bimal Jalan will try to rip through the iron curtain that many say makes money lending and borrowing by banks a smoke-and-mirrors affair.

The busy-season monetary policy he unveils on Tuesday is expected to take big strides in the way banks charge and pay interest, often using too much discretion that the system of “spreads” over a benchmark — the prime lending rate — entitles them to.

In his April policy, the Reserve Bank governor asked banks to provide information on deposit rates across maturities, along with the effective annualised return, to “protect customers and foster meaningful competition”.

Banks were also urged to switch over to the “all-cost” model for borrowers by explicitly declaring processing fee and service costs. They were also told to disclose the maximum and minimum interest rates charged. This information, Jalan advised banks, should be made available to the RBI, which would use it to paint a consolidated picture for all banks’ on its web-site.

However, none of that is available on the RBI site almost seven months after the announcement. Banks are reported to have told Jalan that there were “practical difficulties” in furnishing the kind of details required.

For depositors stung by falling interest rates in recent years, there is no comprehensive information on the annualised returns or deposit rates charged by banks. Therefore, Tuesday’s mid-term review of the monetary and credit policy could see Jalan withdrawing an information-sharing proposal that banks balk at.

However, most analysts agree that the policy will take a fresh look at the maximum spreads charged over the prime lending rates (PLR). Chances are that it will be fixed at a maximum of 4 per cent over the benchmark.

The RBI is unhappy that a few private sector banks are charging a spread of more than 4 per cent. It has always said it wants the differential over PLR to be reduced so that money is lent at reasonable rates.

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