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Banks may set repo rate as benchmark

New loan pricing regime from April 1

Most commercial banks in India are likely to select RBI’s repo rate as the external benchmark to decide their lending rates, from April 1. The repo rate is the key policy rate of the Reserve Bank of India (RBI).

The banking regulator had asked the banks to move to an external benchmark for loan pricing from April 1, a move expected to improve monetary transmission as lenders had, in the past, been found reluctant to reduce lending rate.

Banks had four options from which to choose the external benchmark: the repo rate, the 91-day treasury bill, the 182-day T-bill or any other benchmark interest rate produced by the Financial Benchmarks India Private Ltd (FBIL).

“The repo rate is the most stable one as compared to the other options,” a chief executive of a large public sector bank told , while explaining the reason behind the selection. A few other bank chiefs  spoke to also confirmed that the repo rate is the ideal candidate for the external benchmark. At present, the repo rate is 6.25%.

The marginal cost of fund based lending rate (MCLR) is currently the benchmark for all loan rates. Banks typically add a spread to the MCLR while pricing loans for homes and automobiles.

For the new benchmark, the central bank has mandated that the spread over the benchmark rate — to be decided by banks 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.

If the lending rates are linked to the repo rate, any change in the repo rate will immediately impact the home and auto loan rates, since RBI has mandated the spread to remain fixed over the life of the loan.

Banks against move

Many banks have opposed the move to shift to a new external benchmark for loan pricing on grounds that their cost of funds are not linked to these benchmarks and that without a fall in the costs, it would not be possible to change the rates.

The issue came up for discussion again last week when RBI Governor Shaktikanta Das, along with his deputies, met the bank chiefs to discuss monetary transmission.

“Some of the banks have raised the issue once again during the meeting. The governor said he will look into the issue,” said a bank chief who attended the meeting.

However, banks are not hopeful that the central bank will defer the introduction of the new benchmark.

“When the Indian Banks’ Association met RBI officials some time ago, the message we got is that the central bank is keen to see the new regime kicking in as scheduled.”

RBI was expected to issue the final guidelines on the matter by December-end but the guidelines are yet to come. Banking industry sources indicate that the final guidelines will be issued in March.

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