While maintaining a repo rate status quo, the Reserve Bank of India (RBI), in a shocking news to banks gave great news to borrowers! First, RBI has decided to remove MCLR rates from April, 2019. MCLR was the benchmark rate at which banks would provide lending rates on home loans, personal loans and vehicle loans. It needs to be noted that, RBI has shown disappointment on various occasions at the way banks have been deciding MCLR rate. RBI had stated several times, that banks are not passing the benefits of reductions in RBI policy repo rate to borrowers. Well, now banks are trapped, and RBI has brought in a major relief for borrowers. 

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RBI in today's policy said, "The Report of the Internal Study Group to Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System (Chairman: Dr. Janak Raj) released on October 4, 2017 for public feedback, had recommended the use of external benchmarks by banks for
their floating rate loans instead of the present system of internal benchmarks [Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR)]."

As a step in that direction, it is proposed that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019

Your home loan, personal loan and vehicle loan rates will now be derived by banks taking into account these benchmarks:

  • RBI Bank of India policy repo rate, or
  • Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
  • Government of India 182 days Treasury Bill yield produced by the FBIL, or
  • Any other benchmark market interest rate produced by the FBIL

Currently, the policy repo rate stands at 6.50%. Whereas the overnight treasury yield presented by Financial Benchmarks India Private Ltd (FBIL) shows 6.47% from previous 6.50%.

Check this RBI Policy Review Zee Business Video on Twitter below: 

The spread over the benchmark rate — to be decided wholly at banks’ discretion at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract. 

This means even if a bank has decided to hike a lending rate in near-term future, the old borrowers interest rate will not be impacted and continue to be remain as it is. 

RBI also explained that, 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.

Talking about the above mentioned development, Former SBI chief economist Brinda Jagirdar said that the RBI's proposal for External Selling Marking for Floating Rate Loans is worthwhile. This will not only benefit the MSME sector but also the customers who take home and auto loans at floating rate will also benefit. There are three criteria for external benchmarking - RBI's repo rate, the yield of the 91-day Treasury bill, which will be provided by the Financial Benchmark India Private Limited or the 182-day Treasury Bill's Yield.

Jagirdar added, "The vigilant said that despite the reduction in the repo rate by the RBI earlier, the banks used to cut their interest rates in the desired manner, citing their expensive funds. However, from April 1, 2019, they have to adhere to the externational benchmarking system. This will give RBI the benefit of lowering or increasing the interest rate."

The final guidelines will be issued by the end of December, 2018.