In a moved to aimed at the improve transmission of interest rates, the Reserve Bank of India (RBI) on Wednesday (4 August) has mandatorily asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark effective 1 October.
The move will make home loans and auto loans cheaper as the banks will now be required to pass on the multiple rate cuts the RBI has made in recent monetary policy meetings.
In the notification, the central bank mandated that new floating rate personal or retail loans (housing, auto, etc) and floating rate loans to Micro and Small Enterprises extended by commercial from 1 October, 2019 needs to be benchmarked to one of the following:
- Reserve Bank of India policy repo rate
- Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
- Government of India 6-Months Treasury Bill yield published by the FBIL
- Any other benchmark market interest rate published by the FBIL.
The Union government has been pushing the PSU banks to link their loan interest rates to external benchmarks to ensure smoother transmission of changes in repo rates.
The RBI's monetary policy committee (MPC) has reduced the repo rate by 2.6 per cent since 2014, but the banks have reduced their lending rates by as low as 1.1 per cent during this period, keeping the benefits of the rate cuts from their customers.
Few banks including State Bank of India, Union Bank of India, Central Bank of India, Punjab National Bank and private sector lender Federal Bank have already benchmarked their lending rates to repo rates but many other banks continue to price loans under the marginal cost of funds-based lending rate (MCLR) regime.
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