RBI’s mandated the use of external benchmarks for their floating rate loans instead of the present system of internal benchmarks to improve transparency of how banks price their home and auto loan rates.
The external benchmarks are one of the following: RBI’s policy repo rate, Government of India’s 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or Government of India 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.
Banks at their discretion can charge a margin or spread over the benchmark rate “but it will 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 RBI said.
A committee headed by Janak Raj had recommended the use of external benchmarks by banks for their floating rate loans instead of the present system of internal benchmarks – Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate, and Marginal Cost of Funds based Lending Rate (MCLR).
Also, in order to ensure transparency and standardisation of loan products, “a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category,” the RBI said.
The new guidelines for pricing of loans are applicable for new floating rate personal or retail loans (housing, auto) and floating rate loans to micro and small enterprises extended by banks from April 1, 2019.
The RBI will release final guidelines for new pricing of loans by the end of December 2018. The RBI had in 2016 introduced the Marginal Cost of Funds based Lending Rates (MCLR) system on account of the limitations of the base rate regime. MCLR is linked to the actual deposit rates.