This move, which will come into effect from October 1 is expected to make retail and MSME loans cheaper for borrowers.

RBI makes it mandatory for banks to link retail MSME loan with external benchmarks
Money Lending Friday, September 06, 2019 - 11:01

The Reserve Bank of India has made it mandatory for the banks to link the interest being charged on their lending products to the repo rate. This means all the loans for retail and MSME (micro, small and medium enterprises) borrowers will be based on a floating rate pegged to a benchmark. And as and when this rate is changed, it will automatically apply to these loans. This will come into effect from October 1.

There are two benchmark rates being indicated. There’s the repo rate, which is periodically changed through the policy announcements by RBI. The other is the treasury bill yield-linked rate which is published the Financial Benchmarks India Private (FBIL). This constitutes a three-month or six-month average rate.

This direction by the RBI virtually throws the current method of following the marginal cost of funds-based lending rate (MCLR) out the window. This is because RBI also says the banks have to follow a standard pattern in the interests of transparency any bank can only follow one benchmark rate for all its loan products within each category of loan.

RBI has been forced to take this decision to compel the banks to fall in line since even after dropping the rates by 110 basis points, many banks had not passed on the benefits to their borrowers to this extent.

The contra point being made by experts is that this decision of RBI leaves the managements of the banks with very little scope to manoeuvre. More importantly, the banks cannot bring down the deposit rates and as a result, the bank’s earnings can get impacted going forward.

The largest PSB, the State Bank of India, has at least tried to follow the RBI’s earlier guidelines in linking their vehicle loans to the repo rates and simultaneously linking the savings bank accounts having balances over Rs 1 lakh to the repo rates as well.

From RBI’s perspective, they have only followed the recommendations of the Janak Raj committee. Lastly, the interest rate reset will henceforth be done once in three months and not once a year as before.

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