Retail, SME loans to be linked to repo rate or T-bills

The Reserve Bank of India (RBI) has decided that all new floating rate personal or retail loans (including housing, auto, etc) and floating rate loans to small and micro enterprises (SMEs) extended by banks from April 1, 2019 will be benchmarked to the RBI’s policy repo rate or 91/182 days Treasury Bill yield. The RBI move is expected to bring in more transparency in fixing interest rates and faster transmission of rates.

According to the RBI, the spread over the benchmark rate — to be decided at banks’ discretion at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change. “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,” RBI said. 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. Currently, banks follow the marginal cost of lending rate formula where rates are linked to cost of their funds.

“Banks were slow to pass on the reduction in their MCLRs in January 2017 to their actual lending rates. Of the 12 banks whose spreads widened, six banks took up to six months to pass on the benefit of lower MCLRs to their lending rates; remaining six banks passed on the benefit of their lower MCLRs, but only partially even after six months. This is intriguing as changes in MCLRs are expected to be passed on to at least fresh borrowers immediately,’’ the RBI panel report said.

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