Retail loans to be linked to external benchmarks, not MCLR, starting April 2019

Retail loans to be linked to external benchmarks, not MCLR, starting April 2019
  • 1

New Delhi, Dec 5: Starting April 2019, interest rates on all retail loans, including home loans, auto loans and loans given to micro and small enterprises, will be linked to external benchmarks, and not the marginal cost of funds-based lending rate (MCLR).
These loans will be benchmarked to either the Reserve Bank of India’s repo rate, or the yield on the government’s 91-day treasury bill, or the yield on the government’s 182-day treasury bill, or any other benchmark market interest rate produced by Financial Benchmarks India, the central bank said.
Since April 2016, interest rates on all loans have been linked to MCLR. Before that, they were linked to banks’ base rates.
The decision comes after multiple observations by the RBI that banks have been slow in passing on cuts in policy rates to those borrowing from them. It is based on recommendations made last year by an internal study group constituted by the central bank.
“The spread (margin) 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 central banks said in a post-policy statement.
Although it has not been made mandatory, banks will be free to offer loans linked to such external benchmarks to non-retail borrowers as well.
The RBI said that in order to ensure transparency and standardisation, and to make sure that borrowers fully easily understand loan products, banks will have to adopt a universal benchmark for any particular category of loan.