Skip to main content

Loan pricing via external benchmark likely soon

Loan pricing via external benchmark likely soon
Move will help consumers compare loans fairly
The Reserve Bank of India pulled up lenders for keeping interest rates on loans at a higher level and said it would make another system to fix rates for such loans.The banking regulator expressed concern over base rate and marginal cost of funds-based lending rate (MCLR) and said these internal benchmarks have not improved monetary transmission. A new system using external benchmarks to price loans would be introduced, the RBI said.
In its report, an internal RBI study group to review the working of the MCLR system has suggested switching over to the new system in a time-bound manner, so that better rates are available to borrowers.
The report said banks should use three benchmarks — Treasury bill rate, certificate of deposit rate and RBI’s policy repo rate – for pricing loans. Against the current system of annual reset of interest rates, the panel recommended quarterly reset. All borrowers should be migrated to the new system by March 2019 without a switchover fee.
The Reserve Bank of India (RBI) has pulled up lenders for keeping interest rates on loans at a higher level and said it would make another system to fix rates for such loans.The banking regulator expressed concern over base rate and marginal cost of funds-based lending rate (MCLR) and said these internal benchmarks have not improved monetary transmission. A new system using external benchmarks to price loans would be introduced, the RBI said.
In its report, an internal RBI study group to review the working of the MCLR system has suggested switching over to the new system in a time-bound manner so that better rates are available to borrowers.The report said banks should use three benchmarks — treasury bill rate, certificate of deposit rate and RBI’s policy repo rate — for pricing loans. Against the current system of annual reset of interest rates, the panel recommended quarterly reset. All borrowers should be migrated to the new system by March 2019 without a switchover fee.
Banks would also have the freedom to decide on the spread over the external benchmark, and the spread would remain fixed through the term of the loan, the report said. Even deposits would be linked to one of the three benchmarks.The study group observed that internal benchmarks such as the base rate/MCLR have not delivered effective transmission of the monetarypolicy.banks wereIt also deviating found from that the specified methodologies to calculate rates.
This was being done to inflate the rate and prevent it from falling in line with the cost of funds. Banks did not reduce rates even as the cost of deposits declined significantly. The panel also found that banks included new components in the base rate formula to adjust the rate to a desired level. The slow transmission to the base rate loan portfolio was further accentuated by the long (annual) reset periods.
The RBI had introduced MCLR on April 1, 2016, after finding the then prevailing base rate had failed to achieve the objectives of easier and faster policy transmission. Before the MCLR was rolled out, banks were following a more rigid base rate system, which came into force on July 1, 2010, replacing banks’ prime lending rate.
According to RBI data for commercial banks, the medi- an one-year MCLR has come down from 9.45 per cent in April 2016 to 8.50 per cent in August 2017. The banking industry lobby group, the Indian Banks’ Association (IBA), said in a statement a review of existing MCLR framework and the proposal for an external benchmark was something to be discussed with the stakeholders. holders, IBA, however, refrained from making a specific comment.
The base rate/MCLR regime is also not in sync with global practices on pricing of bank loans.
Addressing the media after the policy review, RBI Deputy Governor Viral Acharya said the report has proposed three possible external benchmarks to which such lending could be tied. “We think internal benchmarks such as the base rate and MCLR, based on data, seem to give banks very high amount of discretion; lots of factors are flexible to them to ensure that the lending rate can be kept high even if monetary policy is going down and accommodative.”
He also said the move was to bring in a better global benchmark. “This will create a fair bit of transparency for borrowers and they can just compare two loans and see which is at the lower spread because the benchmark will be the same.”
The Business Standard, New Delhi, 5th October 2017

Comments

Popular posts from this blog

Budget: Startup sector gets new Fund of Funds, FM to allocate Rs 10K cr

  The Indian startup sector received a boost with Finance Minister Nirmala Sitharaman announcing the establishment of a new fund of funds (FoF) in the Budget 2025. The minister unveiled a fresh FoF with an expanded scope, allocating Rs 10,000 crore. The initial fund of funds announced by the government with an investment of Rs 10,000 crore successfully catalysed commitments worth Rs 91,000 crore, the minister said.   “The renewal of the Rs 10,000 crore commitment to the Fund of Funds for alternative investment funds (AIFs) is a significant step forward for the Indian startup and investment ecosystem. The initial Rs 10,000 crore commitment catalysed Rs 91,000 crore in investments, and I fully expect this fresh infusion to attract an additional Rs 1 lakh to Rs 1.5 lakh crore in capital,” said Anirudh Damani, managing partner, Artha Venture Funds.   Damani further added that this initiative will provide much-needed growth capital to early-stage startups, further strengthenin...

After RBI rate cut, check latest home loan interest rates of top banks for loans above Rs 75 lakh

  The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points from 6.50% to 6.25% in its monetary policy review as announced on February 7, 2025. After the RBI repo rate cut, banks such as SBI, Canara Bank, PNB, and Union Bank among others have cut their repo linked lending rates. Most other banks are also expected to cut their lending rates in line with the RBI rate cut. After banks cut their lending rates, their home loan borrowers will have to pay less interest. Normally, when a lender cuts the lending rate, borrowers get two options: Either to go for a reduction in EMIs or reduce the tenure of the loan. The second option will help the borrowers clear their home loan outstanding faster. In case, the borrower goes for reduction in EMI then the lower lending rate of the lender would mean lower Equated Monthly Installment (EMI) for borrowers.   EMI is the amount you will pay on a specific date each month till the loan is repaid in full.A repo rate-linked home ...

GST collections rise 9.9% to exceed Rs 1.96 trillion in March 2025

  Gross GST collection in March grew 9.9 per cent to over Rs 1.96 lakh crore, government data showed on Tuesday. GST revenue from domestic transactions rose 8.8 per cent to Rs 1.49 lakh crore, while revenue from imported goods was higher 13.56 per cent to Rs 46,919 crore. Total refunds during March rose 41 per cent to Rs 19,615 crore. After adjusting refunds, net GST revenue stood at over Rs 1.76 lakh crore in March 2025, a 7.3 per cent growth over the year-ago period.       - Business Standard 02 th March, 2025