Yes. It is a directive from RBI that banks should link interest rates on loans to Retail and Small business borrowers, to external bench mark wef 1st October 2019. Salient features and points to be noted area:
- Banks are given the leverage to link loans extended to the other segments also to the External benchmark however, is not compulsory.
- This means there will be more transparency and faster transmission of rates both during fall and rise of interest rates.
- The GDP expansion has slowed down to the slowest pace in the past six years at 5% in the June quarter which has necessitated to lower the cost of funds to consumers and businesses.
- Wherever the RBI policy rate cuts have not been fully passed on to the consumers, there is a possibility of the cost of interest rates coming down in their cases.
- Banks are under pressure to improve the monetary policy transmission and RBI has said that transmission of policy rates at just 29 basis points (BPS) this year, as compared to a combined repo rate cut of 75 bps (excluding the 35 bps rate cut in August this year) has not been in line with RBI’s expectations.
- It is noted that some banks have already started linking their lending rates to an external bench mark, which includes, State Bank of India, Union Bank of India, Central Bank of India, Punjab National Bank, Indian Bank and Federal Bank.
- Since March 2016 banks have been operating their pricing policy through MCLR (Marginal Cost of Lending Rates) and the Central Bank has remarked that the transmission of policy rate is not satisfactory.
- Banks have the option to select a rate between following:
- The Repo Rate,
- Government’s three months and six months Treasury bill yield which is published by Financial Benchmarks India Pvt. Ltd (FBIL) or
- Any other benchmark market interest rate published by FBIL.
- RBI has made it clear that a bank should follow a uniform external benchmark within a particular category which means that banks cannot adopt multiple benchmarks within a Category.