The Reserve Bank of India (RBI) has proposed that banks will now have to link the interest rates charged by them on different categories of loans to the external benchmarks instead of the presently used internal benchmarks for better transmission of the policy rates.
The home loan takers have often complained about the opacity of interest rate fixing mechanism. Banks have always been blamed for not passing on the rate cut benefits to their customers. A common grievance of borrowers has been that whenever RBI raised the policy rates, the banks were quick to pass on to the loan takers.
However, now the transmission of policy rates is expected to become more transparent with the RBI replacing MCLR (marginal cost of funds based lending rate) with external benchmark. As and when the external benchmark rate changes, it will reflect in the change in interest rate of the loan as well.
RBI said in its statement that it has proposed that all new floating rate personal or retail loans i.e. housing, loans etc. will be linked to the new benchmark with effect from April 1, 2019. According to the proposal, the loans can be benchmarked to any one of the following:
a) Reserve Bank of India policy repo rate, or
b) Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
c) Government of India 182 days Treasury Bill yield produced by the FBIL, or
d) Any other benchmark market interest rate produced by the FBIL
However, the spread over the benchmark rate is to be wholly decided by the bank at its discretion. It should remain unchanged through the life of loan unless the borrowers' credit assessment undergoes a substantial changes, said the statement.