External benchmarks make an entry

Linking retail loans with external yardstick aimed at bringing in more transparency in pricing In a bid to bring in more transparency to loan pricing mechanism, particularly for small borrowers, the Reserve Bank of India (RBI) has asked banks to link the floating interest rate on retail loans and loans extended to micro and small businesses to external benchmarks. At present, these loans are linked with marginal cost of funds based lending rate, which is an internal benchmark of a bank. The RBI said the lending rate on such loans should be linked to one of the four benchmarks — Reserve Bank of India policy repo rate, Government of India 91-day treasury bill yield, Government of India 182-day treasury bill yield or any other benchmark market interest rate produced by the Financial Benchmarks India Private Ltd. Banks have to implement the new scheme by April 1,2019. The move is expected to end the practice of lowering interest to only new customers to attract more business while the existing customers continue to pay higher rate. Banks to decide spread “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,” the RBI said. Banks are, however, free to offer such external benchmark linked loans to other types of borrowers as well. “The linking of floating rates to external benchmarks will lead to reduction in credit costs in the long run for retail and MSME sector,” said Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank. “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,” the RBI said, adding the final guidelines would be issued by the end of December 2018.

Source  :  https://www.thehindu.com/todays-paper/tp-business/external-benchmarks-make-an-entry/article25675610.ece

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