The Country’s central bank, Reserve Bank of India(RBI) has asked banks to link all new types of floating-rate loans (home, auto loans & and micro, small and medium enterprises (MSME)) to external benchmark like repo rate from October 1, 2019.
Key points:
i.Reason: The move comes after the borrowers of industry and retail loans have been complaining that despite the reduction in the repo rate by the Reserve Bank, commercial banks are not giving full benefits to the consumers. RBI has cut the repo rate by 110 basis points(bps) in 2019, but only up to 40 bps of this benefit has been given to consumers by banks.
ii.Benefit: With this decision, the benefit of the reduction in policy interest rates is expected to reach the borrowing consumers relatively fast & all kinds of loans are to be cheap.
iii. External benchmark: The external benchmark will be the repo rate fixed by the Reserve Bank / the Treasury bill of 3 months or 6 months /any other benchmark published by the Financial Benchmarks India Private Ltd (FBIL). Banks will be exempt to add margin if they want to spread as much as they want above the benchmark. The banks will have to re-set the external benchmark every 3 months.
iv. The Customers who are on existing MCLR /Base Rate/BPLR(Benchmark Prime Lending Rate) system can switch over to a new benchmarked loan after repayment or renewal of their existing loan.
v.1st bank: The State Bank of India (SBI) is the 1st bank to link some of its loans to repos. After many more banks have also linked their loans to repo / any other external standard.
vi. Background: The Reserve Bank formed the Internal Study Group (ISG) – (Chairman: Dr. Janak Raj) in August 2017 to review the working of the Marginal Cost of Funds based Lending Rate (MCLR) System, that recommended linking of loans to external standards.
About RBI:
Governor: Shaktikanta Das
Headquarters: Mumbai
Founded: 1 April 1935