Borrowers have a reason to cheer as the Reserve Bank of India (RBI) has asked banks to mandatorily link all retail and small and medium-sized enterprises (SME) loans to an external benchmark from October 1 this year. The move is to boost the transmission of rate cut benefits to borrowers. The RBI has clarified that other types of loan segments will continue to exist.
The central banks said it has observed that due to various reasons banks have not been able to satisfactorily transmit the changes in lending rate under MCLR to consumers.
“The RBI, therefore, has 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 effective October 1, 2019,” the central bank said.
It further added that banks have been allowed to choose between the repo rate, the government’s three-month and six-month Treasury Bill yield published by the Financial Benchmarks India Pvt. Ltd (FBIL), or any other benchmark market interest rate published by FBIL. As per the RBI, the interest rate under an external benchmark will be reset at least once in three months.
The RBI also clarified that consumers cannot choose multiple loan benchmarks, but banks are free to choose any benchmark available for lending rates. It said, “The banks are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.”
After the RBI’s nudge, many prominent banks recently linked lending rates to repo rate linked rates. Banks have been linking all their lending rates to marginal cost of funds-based lending rate (MCLR) from April 2016.
During the RBI monetary policy review last month, Governor Shaktikanta Das had said that the transmission of rate cuts has only been 29 basis points by the banks compared to the 75 basis points cut in the repo rate in the last three monetary policy Committee (MPC) review.