After careful examining and study, RBI has not been satisfied with the present lending rates of banks under the present MCLR framework and henceforth defined changes in the transmission of policy rates. RBI has therefore made it mandatory for the banks to link the new floating rate on personal and retail loans to MSMEs to an external benchmark. This will be effective from October 1, 2019. The banks can choose any of the benchmark of their choice.
The interest rate is one crucial element in the banking and credit industry. Over the years, the borrowers always had the grievances that the banks were quick enough to escalate the loan rates as the policy rates of the RBI were increased. However, the reverse was not true as the downfall of policy rates had no benefits to the customers. But, now with RBI replacing the MCLR with the external benchmark, the banks and lenders cannot hold the benefits of the borrowers when the rates go down.
As per the new guidelines issued by the RBI, the borrowers can use any of the below given external benchmarks.
- RBI’s repo rate
- The yield on the government’s treasury bill of 91 days
- The yield on the government’s treasury bill of 182 days
- Any other benchmark market interest rate produced by the Financial Benchmarks India.
The banks can choose their offerings over the benchmark rate provided that the credit risk premium shall undergo any change only with a substantial change in the borrower’s credit assessment as defined in the loan contract. The banks can offer these external benchmarked linked loans to other borrowers as well.
This will result in the ushering of a new era for the borrowers who will now experience transparency in their loan credentials with the increase and decrease in the benchmarks. This will revolutionise the loan industry and allow the borrowers to save on some money which would otherwise go as an interest to the lender. This move of RBI’s is purposed to incur a standardisation so that the borrowers can understand their loan products in a better way. Thus for a particular category of loan, the banks will have to adopt a universal benchmark and not opt for multiple benchmarks within the same loan category.
In the past with any change in the policy rates, the banks revised their benchmark MCLR rates as per their own judgement. They were often criticised for not passing the benefits of rate cuts to the borrowers. This will change now and the change in the external benchmarks rates will be directly passed on to the borrower so that they are well aware of their potential savings or expenses.
Home loan interest rates, personal loan interest rates, auto loan interest rates and the interest rates on loans offered to the MSMEs will now have a floating nature which will be in good for the borrowers. The borrowers can now avail these loans without having to pay the same interest amount in their loan tenure. If the external benchmark chosen by the bank witnessed a downfall, the borrower will also be benefitted and will be liable to pay lesser interest.
Home loans for salaried and other loans can now be availed with a new and positive outlook wherein the borrowers will be on the same footing in regard to the policy changes as the banks and NBFCs. The move is well planned and aims to bring forth the needed transparency in the lending sector.
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