Retail, MSME floating rate loans to start with
MUMBAI: Pricing of credit in India’s banking space that has experimented several benchmarking systems such as prime lending rate (PLR), base rate and the later format of marginal cost-based lending rates (MCLR), is finally set to be linked to external benchmarks from October 1– for certain categories of floating rate loans to start with.
There have been loud and persistent calls from the industry to improve transmission of interest rates, as well as to instil transparency into the pricing of credit.
After months-long deliberations and consultations, the Reserve Bank of India (RBI) on Wednesday asked banks to link their lending rates on floating rate loans such as retail personal and micro, small and medium enterprises (MSME) to an external benchmark from October1.
RBI in its statement has informed the banks that they are free to link external benchmarks to other segments of loans if they desire so. Some banks have already commenced linking their lending rates to external benchmarks, especially to RBI’s repo rates.
According to media reports, public sector banks such as State Bank of India (SBI), Union Bank of India (UBI), Central Bank of India (CBI), Punjab National Bank (PNB) and the leading private sector bank from Kerala, Federal Bank, have already linked some of their loans to external benchmarks.
The external benchmarks that can be used for linking lending rates include RBI’s policy repo rate; Government of India (GoI) 3-months Treasury Bill yield published by the Financial Benchmarks India Pvt Ltd (FBIL); GoI 6-months Treasury Bill yield published by the FBIL and any other benchmark market interest rates published by the FBIL.
“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,” RBI said.
RBI saoid a bank will have to adopt a uniform external benchmark within a loan category, meaning that the adoption of multiple benchmarks by the same bank is not allowed within a loan category.
“While lenders can decide on the spread they charge over the benchmark to calculate the final interest rate, RBI said that the spread can be changed only if the credit assessment of the borrower undergoes a substantial change. The interest rate under external benchmark shall be reset at least once in three months,” RBI further said.