RBI forces banks to link retail loans with external benchmarks from October 1

Mumbai, Sep 4 () The RBI forced banks to link all new floating-rate loans for housing, cars and MSMEs to external benchmarks such as the repository since October 1, a measure aimed at ensuring faster transmission of interest rate cuts to borrowers. .

Industry and retail borrowers have complained that banks do not spend the entire reduction of the RBI policy rate (repo rate).

In a circular issued on Wednesday, the Reserve Bank of India (RBI) said that it has been observed that, due to several reasons, the transmission of changes in the policy rate at the interest rate of banks at low cost Current marginal interest rate based on funds (MCLR)) the framework has not been satisfactory.

Therefore, it has now decided to make it mandatory for banks to link all new personal or retail variable rate loans and variable rate loans to MSMEs (micro, small and medium enterprises) to an effective external benchmark from October 1, 2019, the circular said.

In 2019, the Reserve Bank already reduced the interest rate on short-term loans by 110 basis points, but according to reports, banks only transferred up to 40 bp to borrowers.

The external benchmarks, to which banks must link their interest rates, could be repos, yield of treasury bills at 3 or 6 months, or any other benchmark published by Financial Benchmarks India Private Ltd (FBIL).

Banks have also been asked to restore the interest rate under external reference at least once in three months.

To ensure transparency, standardization 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 RBI added.

The circular also said that while banks are free to decide the differential over the external benchmark, the credit risk premium can change only when the credit assessment of the borrower undergoes a substantial change.

In addition, other components of the differential, including the operating cost, could be modified once every three years.

Existing loans and credit limits linked to the MCLR/Base Rate/BPLR will continue until repayment or renewal, as appropriate.

The RBI's decision becomes important amid the clamor for reducing the cost of loans to boost consumer demand, which is one of the main reasons for the economic slowdown.

High frequency indicators, such as a significant drop in sales of cars and other non-durable consumer products, point to a slowdown in demand.

The government has announced a series of measures such as liquidity support to the NBFC sector to further boost credit disbursement.

The RBI had previously asked banks to link rates to the extreme benchmark since April 1, but it was deferred since lenders wanted more time.

The State Bank of India had become the first bank to link certain loans to the repository. Later, a large number of other banks also began linking their loan products with repositories or other external benchmarks.

In August 2017, the RBI had established an Internal Study Group (ISG) to examine the operation of the MCLR system that was established in April 2016. The ISG had recommended moving to an external interest rate system based on the benchmark. DP NKD CS MKJ