In a big move that would impact retail loans, the Reserve Bank of India while announcing the monetary policy review for December 2018, asked banks to peg new floating rate loans to external benchmarks from April 1, 2019.
The central bank said, “The Report of the Internal Study Group to Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System released on October 4, 2017 for public feedback, had recommended the use of external benchmarks by banks for their floating rate loans instead of the present system of internal benchmarks [Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR)].”
As a result, it has been decided to link all new floating rates-loan with the below listed external benchmarks from April 1, 2019:
– Reserve Bank of India policy repo rate, or
– Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
– Government of India 182 days Treasury Bill yield produced by the FBIL, or
– Any other benchmark market interest rate produced by the FBIL.
It further added that the spread over the benchmark rate decided by the bank at the start of the loan will remain unchanged for the tenure, unless the borrower’s credit score undergoes a substantial change and as agreed upon in the loan contract.
“Banks are free to offer such external benchmark linked loans to other types of borrowers as well. In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category. The final guidelines will be issued by the end of December 2018,” the central bank said.
The RBI maintained status quo on key rates and kept the repo rate unchanged at 6.50%. However, in a surprise move, it slashed the SLR by 25 basis points to 19.25.
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