Hyderabad: India’s Central bank the Reserve Bank of India (RBI) on Wednesday directed banks to link their loan products to key repo rates or external benchmarks.
This repo-linked loans will come into effect from October 1, 2019, onwards. The latest decision is set to home loans and auto loans affordable from October onward. Banks will now have to pass on the multiple rate cuts that the RBI has made in recent monetary policy meetings. The move will also ensure faster transmission of reduction in interest rate to borrowers.
RBI held a series of meetings with stakeholders and after considering the suggestions, the Central bank has decided to link all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to micro and small enterprises extended by banks with effect from October 01, 2019, to external benchmarks.
But the latest decision is not limited to new loans only. Banks are now free to provide the benefit of external benchmark-linked loan to other borrowers as per their discretion.
As a step in that direction, it was announced in the fifth bi-monthly monetary policy statement for 2018-19 under ‘Statement on Developmental and Regulatory Policies’ dated December 5, 2018.
The RBI has given banks an option to choose the external benchmarks, which include policy repo rate decided by the monetary policy committee (MPC). The other two parameters include 3-month and 6-month Treasury bill yields published by the Financial Benchmarks India Private Ltd (FBIL). The banks can also use any other benchmark market interest rate published by the FBIL.
It may be recalled that Union finance minister Nirmala Sitharaman had said the banks have agreed to link their loan products. Ms Nirmala had already announced the first tranche of measures to remedy the slump in the economy.
RBI in a statement further said, “However, any bank will not be allowed to adopt multiple benchmarks within a single loan category. This limitation has been introduced to maintain transparency. Moreover, banks are free to decide the spread under the external benchmark. But, the repo-linked interest rates have to be reset at least once in three months.”
Floating rate term loans sanctioned to borrowers are eligible to prepay a floating rate loan without pre-payment charges. The borrowers are eligible for a switchover to external benchmark without any charges, fees, except reasonable administrative and legal costs.
The credit risk premium is expected to change if the borrower’s credit assessment also changes as agreed upon in the loan contract. Further, other components of spread, including operating cost, could be altered once in three years.