External benchmark-based lending must: RBI

Why is it in the news?
  • The Reserve Bank of India (RBI) made it mandatory for all banks to link floating rate loans to an external benchmark.
Highlights of the Report
    • The floating rates which to be linked to the repo rate are- retail customers and loans to micro, small and medium enterprises (MSME).
    • The move is aimed at faster transmission of monetary policy rates.
    • Most of the Banks have been reluctant to cut interest rates despite the RBI lowering the repo rate by 110 basis points (bps) between February and August.
    • Some banks have already started to link home and auto loan rates to the repo rate.
    • Existing Practice:
      (1) At present, interest rates on loans are linked to a bank’s marginal cost of fund-based interest rate (MCLR).
      (2) Banks can choose from one of the four external benchmarks:
    -Repo rate,
    -Three-month treasury bill yield,
    -Six-month treasury bill yield,
    -Any other benchmark interest rate published by Financial Benchmarks India Private Ltd.
     
      • About MCLR:
        (1) It is the internal benchmark lending rate.
        (2) It is the rate below which the scheduled commercial banks cannot lend to its customers.
        (3) It facilitates the monetary transmission. It is mandatory for banks to consider the repo rate while calculating their MCLR.
    Source
    The Hindu.




    Posted by Jawwad Kazi on 5th Sep 2019
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