The Reserve Bank of India (RBI) is considering asking banks to link loans to an external benchmark such as the repo rate to improve transmission of policy rates and foster economic growth.
In December, RBI said that banks must set their interest rates for new loans against an external benchmark beginning 1 April. The rule was supposed to apply to all new retail loans and small business loans with floating rates from that date.
The proposal, however, was opposed by bankers who wrote to the regulator citing their concerns. In April, Das postponed the linking to external benchmarks and said RBI would discuss the proposal with the parties concerned before taking a decision on implementing it.
All Banks Should Link Loans, Deposits to Repo Rate
While SBI was the first one to link its loans and deposits to the repo rate from May and home loans from July, six other peer banks, like Bank of Baroda, Union Bank, and Canara Bank, among others, announced the same last week under which the asset side pricing has moved down fast. The move comes even as the regulator has decided not to push banks for this, considering their poor finances.
These six PSBs announced the switch-over after the last monetary policy wherein RBI lowered the repo rates by 35 bps to a nine-year low of 5.4 per cent and has ruled out asking banks to do so banks are just about coming out of the NPA mess and it seems that they need to be given more time to improve their finances.
The process of shifting to an external benchmark on rates needs to be faster and our expectation is that they should move faster.
“I think the time has now come to formalise this linking of new loans to external benchmarks like repo rate. We are monitoring this and will be initiating necessary steps,” RBI Governor Shaktikanta Das said. “We will definitely play our role as the regulator to work with banks, to see the trend in the market and take steps that will formalise these linking of new loans to the repo rate or to an external benchmark.”
A Less Expensive Option for Borrowers
Transmission of rates was a major concern by the RBI. The banks were not passing the benefit of rate cut by RBI to borrowers. For instance, the one-year MCLR rates offered by SBI in October 2018 and August 2019 were 8.5 per cent and 8.25 per cent, respectively. Similarly, ICICI Bank’s one-year MCLR remained unchanged at 8.65 per cent from October 2018 to August 2019.
However, in this period, the repo rate has been cut from 6.5 per cent to 5.4 per cent by the RBI. Clearly, banks have been slow in passing the benefits of rate cuts to borrowers.
In the December 2018 monetary policy meet, the RBI asked banks to link all floating rate retail loan products to external benchmarks starting April 2019.
The RBI had stated that banks should benchmark the rates to either the RBI policy repo rate or Government of India’s 91-day or 182-day Treasury bill yields as developed by the Financial Benchmarks India Private Ltd (FBIL) or any other external benchmark developed by the FBIL.
However, during the consultations with the RBI, several banks opposed the decision of linking lending rates to an external benchmark, indicating that their cost of funds was not linked to those external benchmarks and delayed the implementation indefinitely. However, there is still no official announcement on this development from the RBI. Even so, a couple of banks have introduced the repo rate linked home loan scheme.
MCLR Cut
- These lenders have also reduced their benchmark loan pricing rate — the marginal cost of fund based lending rate — days after the Reserve Bank of India reduced the repo rate by 35 basis points (bps) on 13August19.
- Bank of India reduced its one-year MCLR — to which 80% loans are linked — by 25 bps, to 8.35% effective Saturday.
- Bengaluru-based Syndicate Bank also reduced the one-year MCLR by 25 bps to 8.35%. Allahabad Bank’s one year MCLR was reduced by 15 bps to 8.4% effective 14August 19. The Kolkata-based lender also reduced deposits rates on various tenures by 10 bps. The new rate for deposits of 1 year to less than 2 years will be 6.6%.
- Indian Overseas Bank also lowered its interest rate on loans by 15 bps in one-year-and-above tenors and 10 bps in the below-one-year tenors effective 17August19. Union Bank said, in the current scenario, it expected MCLR to further soften by up to 15 bps.
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