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Banks pushing for benchmark rate for term loans, deposits

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					Business Line – December 31, 2007

Banks pushing for benchmark rate for term loans,
deposits
IBA panel to submit proposals to Reserve Bank of India shortly


Unlike in the developed market, in India there is no short-term benchmark rate
which is acceptable to all players and on which floating rates can be priced.
Mibor is available only for overnight rate.




N.K.Kurup

Mumbai, Dec 30 Once again, banks in India are trying to work out a transparent
benchmark interest rate for term loans and deposits.

Indian Banks Association (IBA) has renewed its initiative to work out an
indicative inter-bank term money rate or Mumbai inter-bank offered rate
(Mibor).

The monetary policy committee of IBA which discussed the subject at its meeting
last week has decided to submit a proposal to the Reserve bank of India, an
official who attended the meeting said.

In the absence of a reference rate like Libor, banks in India price term loans and
deposits mainly taking into account the credit risk and the asset-liability gap. An
indicative rate or Mibor will help banks price loans and deposits in a more
transparent way, the official said.

Unlike in the developed market, the term money market is not active in India.
And as a result, there is no short-term benchmark rate which is acceptable to all
players and on which floating rates can be priced, said a banking analyst.

Currently, Mibor is available only for overnight rate or call rate. “You cannot price
your assets on overnight rates. The idea is to develop a credible indicative six-
month rate, which can be used for pricing floating rate products”, the official
said.

Floating rate loans can be priced X + Mibor depending on the credit risk.
Similarly, term deposit rate can be fixed X - Mibor, taking into account fund
needs of the bank, he said.

Meeting with RBI
IBA is expected to discuss the subject with the RBI at the pre-monetary policy
meeting scheduled to be held in January.

IBA plans, it is learnt, to adopt the method being followed by British Bankers
Association to announce the reference rate Libor – the London inter-bank offered
rate. This is the average rate at which the members of BBA are willing to lend to
banks in the London money market.

The association will identify ten large banks that are prepared to offer their rates
on a daily basis. IBA will work out the benchmark rate and announce it at a
particular time everyday, the official said.

One suggestion is that, to begin with major public sector banks can announce a
benchmark inter-bank rate. It is not sure whether IBA will go in for such a
system.

The Mibor, which is currently available, (developed by National Stock Exchange),
is used mainly for call rates.

				
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