Thursday, Dec 13, 2018 | Last Update : 11:47 AM IST

Banks can’t change return on loans midway, says RBI

THE ASIAN AGE.
Published : Dec 6, 2018, 1:19 am IST
Updated : Dec 6, 2018, 1:19 am IST

RBI asks banks to link all floating rates to external benchmark like repo.

The new regime will also be applicable for any floating loans advanced to MSMEs.
 The new regime will also be applicable for any floating loans advanced to MSMEs.

Mumbai: In a move that will increase transparency in the pricing of loans, the Reserve Bank (RBI) on Wednesday asked banks to link all floating rate retail loans like housing and auto loans to an external benchmark with effect from April 2019. This is part of RBI’s effort to ensure better monetary policy transmission, as the present system followed by banks did not benefit final consumers in the form of lower borrowing cost whenever RBI went for a cut in policy repo rates.

An internal study group constituted by RBI had recommended moving towards an external benchmark by banks for their floating rates instead of the present system of internal benchmarks. The new regime will also be applicable for any floating loans advanced to MSMEs.

The RBI has listed out few benchmarks against which banks can fix their loans. These include RBI’s repo rate, government’s 91 days Treasury Bill yield produced by the Financial Benchmarks India (FBIL), government’s 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.

While banks have the discretion to decide the spread over the benchmark at the inception of the loan, RBI said it should remain unchanged through the life of the loan unless the borrowers credit assessment undergoes a substantial change.

Banks are free to offer such external benchmark linked loans to other types of borrowers as well. 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 added.  

“The proposal is expected to improve the transparency in loan pricing by banks as the existing benchmarks, especially the base rate, have not led to a full transmission of the benefits of decline in cost of funds for banks’ to borrowers.  Furthermore the profitability of banks may see a higher volatility, unless they are able to raise floating rate deposits linked to external benchmarks. On the other hand, for the borrowers, it may lead to a more frequent resets on their EMIs,” said Icra’s Karthik Srinivasan said.

Tags: reserve bank, retail loans, repo rates