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    Question

    The Reserve Bank of India (RBI)’s study group,

    which recently submitted its report on an external benchmark rate for banks, has revealed several startling and “disconcerting” banking practices, including violation of the RBI guidelines, inflating of base rate and arbitrary adjustment of spreads. Such malpractices, in turn, aided banks in fixing interest rates on various loan products, including home, automobile and corporate loans, at inflated levels despite the sustained cut in the repo rate by the RBI. While the transmission to interest rates on fresh loans (mainly home loans) was significant, it was muted to outstanding loans (base rate and MCLR). ____________________. This led to an inappropriate calculation of the cost of funds and no change in the base rate even as the cost of deposits declined significantly. In other words, even when the RBI has cut repo rate by 200 bps since December 2014, EMIs on home and other loans failed to come down for old customers. Between January 2015 and August 2017, the median base rate of banks declined by only 75 bps against 158 bps decline in the banks’ median term deposit rate, and 195 bps decline in the weighted-average domestic term deposit rate. The study group, headed by Janak Raj, principal adviser, Monetary Policy Department, included four chief general managers from various departments of the RBI. In each of the following questions a short passage is given with one of the lines in the passage missing and represented by a blank. Select the best out of the five choices given to make the passage complete and coherent (Coherent means logically complete and sound)
    A Even after 18 months of its introduction, in most banks, only around 40 per cent of the corporate portfolio and one-fourth of retail portfolio are under the MCLR regime. Correct Answer Incorrect Answer
    B The analysis said that banks deviated in an ad hoc manner from the specified methodologies for calculating the base rate and the MCLR to either ā€œinflate the base rate or prevent the base rate from falling in line with the cost of fundsā€. Correct Answer Incorrect Answer
    C Moreover, it was observed that the effective interest rate burden on the borrower remains the same even after switching to the MCLR regime from the base rate regime. Correct Answer Incorrect Answer
    D The panel said many banks indulged in arbitrary adjustment of spreads. Correct Answer Incorrect Answer
    E A number of banks levied a one-time switch-over fee on migration of advances from the base rate to the MCLR regime,ā€ the RBIā€™s panel on new benchmark said. Correct Answer Incorrect Answer

    Solution

    The correct answer is B

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