Loan interest rates against External Benchmark

BE/RBI NOTE/54/2018

Effective from 1st April 2019 Interest rates on new loans will be fixed by banks against an external benchmark as per communication released by RBI.  What is cause and effect of this?

  1. The existing loans will not be affected with the change in the rules
  2. As of now banks are pricing their loans against their marginal cost of funds based lending rate (MCLR).
  3. RBI would be announcing the entire benchmark rates by the end of this month.

Effects:

  • It is said to be an attempt to bring transparency into the Loan pricing.
  • With this changes Banks will now be free to decide on the external benchmark whether it is
    • RBI’s policy repo rate
    • 91 -day Treasury Bill yield
    • 182 –day Treasury Bill yield or
    • any other benchmark market interest rate produced by Financial Benchmarks India Pvt.Ltd.,(FBIL) including Mumbai interbank offered rate or MIBOR.

Conclusion:

  • The way in which banks fix their rates is critical for smooth transmission of policy rates.
  • To make this process more transparent RBI has asked banks to over the years to price their loans against their benchmark lending rates which is Base Rate and then on to MCLR.
  • This is the first time that banks have been asked to price their loans against an external benchmark
  • FIBIL which was formed in the year 2014 is jointly owned by
  • Fixed Income Money Markets and Derivatives Association
  • Foreign Exchange Dealers Association of India and
  • Indian Banks Association.

Note:

The new rule would be applicable for all new retain loans and small business loans with floating rates.

Author: Admin Bankedge

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