Link lending rate to external benchmark from October 1: RBI to banks
Highlights
- Industry and retail borrowers have been complaining that banks do not pass on the entire RBI's policy rate (repo rate) reduction to them
- In 2019, the Reserve Bank has already reduced the repo or short-term lending rate by 110 basis points (bps), but the banks have reportedly passed on only up to 40 bps to borrowers
(Representative image) NEW DELHI: The Reserve Bank of India (RBI) on Wednesday made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark, with effect from October 1, 2019 for faster transmission of rate cut to borrowers.
"It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds based lending rate (MCLR) framework has not been satisfactory," RBI said in a statement.
The new floating rates for housing, auto, MSME sector shall be benchmarked to either RBI's repo rate, government of India's 3-month or 6-month treasury bill yielded by the Financial Benchmarks India Private Limited (FBIL) or any other benchmark market interest rate published by the FBIL, the central bank said.
In 2019, the Reserve Bank has already reduced the repo or short-term lending rate by 110 basis points (bps), but the banks have reportedly passed on only up to 40 bps to borrowers.
RBI has also directed the banks to adopt a uniform external benchmark within a loan category. In other words, a bank cannot adopt multiple benchmarks within a loan category.
The circular further said while the banks are free to decide the spread over the external benchmark, the credit risk premium "may undergo change only" when borrower's credit assessment undergoes a substantial change.
The banks have also been asked to reset the interest rate under external benchmark at least once in three months.
Existing loans and credit limits linked to the MCLR/base rate/BPLR shall continue till repayment or renewal, as the case may be.
The decision of the RBI assumes significance amid clamour for reducing borrowing cost to push consumer demand, which is one of the major reasons for slowdown in the economy.
The RBI had earlier asked the banks to link the rates to extrernal benchmark from April 1, but it was deferred as the lenders wanted more time.
The State Bank of India (SBI) had become the first bank to link its certain loans to repo. Later, a host of other banks too started linking their loan products to repo or other external benchmarks.
(With PTI inputs)
"It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds based lending rate (MCLR) framework has not been satisfactory," RBI said in a statement.
The new floating rates for housing, auto, MSME sector shall be benchmarked to either RBI's repo rate, government of India's 3-month or 6-month treasury bill yielded by the Financial Benchmarks India Private Limited (FBIL) or any other benchmark market interest rate published by the FBIL, the central bank said.
In 2019, the Reserve Bank has already reduced the repo or short-term lending rate by 110 basis points (bps), but the banks have reportedly passed on only up to 40 bps to borrowers.
RBI has also directed the banks to adopt a uniform external benchmark within a loan category. In other words, a bank cannot adopt multiple benchmarks within a loan category.
The circular further said while the banks are free to decide the spread over the external benchmark, the credit risk premium "may undergo change only" when borrower's credit assessment undergoes a substantial change.
The banks have also been asked to reset the interest rate under external benchmark at least once in three months.
Existing loans and credit limits linked to the MCLR/base rate/BPLR shall continue till repayment or renewal, as the case may be.
The decision of the RBI assumes significance amid clamour for reducing borrowing cost to push consumer demand, which is one of the major reasons for slowdown in the economy.
The RBI had earlier asked the banks to link the rates to extrernal benchmark from April 1, but it was deferred as the lenders wanted more time.
The State Bank of India (SBI) had become the first bank to link its certain loans to repo. Later, a host of other banks too started linking their loan products to repo or other external benchmarks.
(With PTI inputs)
more from times of india Business
LATEST VIDEOS
All Comments ()+^ Back to Top
Refrain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks, name calling or inciting hatred against any community. Help us delete comments that do not follow these guidelines by marking them offensive. Let's work together to keep the conversation civil.
HIDE