RBI defers linking loan interest rates to external benchmark

RBI has deferred its plan to replace MCLR with an external benchmark as the basis for fixation of interest rates for retail loans by banks. The move to link interest rates on retail loans to an external benchmark was expected to increase transparency and speed of transmission of changes in interest rates in economy. Deferring this move makes the wait for such a system longer for borrowers.

Interestingly, SBI has announced its plan for linking interest rates on savings accounts having balances above Rs 1 lakh and overdraft, cash credit accounts to the repo rate in a partial manner from May 1, 2019.

As per the policy statement, RBI said, "Taking into account the feedback received during discussions held with stakeholders on issues such as (i) management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and (ii) the lead time required for IT system upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates."


Previously, the central bank in its December bi-monthly monetary policy in 2018 announed its move to link all the floating rate personal or retail loans (housing, auto etc.) and micro and small enterprises to any of the four external benchmarks. The move to link interest rates on retail and personal loans was supposed to come into effect from April 1, 2019 .

The four external benchmarks that were proposed in its earlier statement were:
a) Reserve Bank of India policy repo rate;
b) Governement of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL);
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.

The move was expected to ensure better transmission of policy rates. Currently, the pricing of loans is based on the internal benchmarks, i.e., base rate, benchmark prime lending rate (BPLR) and marginal cost of funds based lending rate (MCLR).