Housing, auto loans may become cheaper from tomorrow as banks to link interest rates to external benchmark

Loans are expected to become cheaper from Tuesday as the banks will link interest rates on loans to retail and small business borrowers to an external benchmark following the order by the Reserve Bank of India (RBI), said a media report.

In order to aid effective downward transmission of the RBI’s policy rate cuts, the central bank had on 4 September said that the lenders must link all new floating-rate loans for housing, auto and micro, small and medium enterprises (MSMEs) with external benchmark like repo from 1 October.

Accordingly, the mandatory RBI order is expected to bring down the cost of the loans by 30 basis points in some cases, said a report in The Economic Times.

Early this month, the RBI, in a circular, had said that it had been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds based lending rate (MCLR) framework has not been satisfactory.

Therefore, it has now decided to make “it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs (micro, small and medium enterprises) to an external benchmark effective 1 October 2019”, the circular said.

The RBI gave the banks options to benchmark their floating rate loans either to repo rate, three-month or six-month treasury bills or any benchmark market interest rate published by Financial Benchmarks India Private (FBIL).

On 23 September, State Bank of India (SBI) had said it would adopt repo rate as the external benchmark for all floating rate loans for MSME, home and retail loans, from 1 October 2019.

In 2019, the Reserve Bank has already reduced the repo or short-term lending rate by 110 basis points, but the banks have reportedly passed on only up to 40 bps to borrowers.

— With PTI inputs