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RBI pushes for fair pricing of home, auto loans

DNMUM427540 | 12/6/2018 | Author : Manju AB | WC :546 | Business & Economy



Retail customers will get more transparent and a fair pricing for loans as Reserve Bank of India (RBI) makes it mandatory for all floating interest rates on personal, home, car, auto and Micro and Small Enterprises (MSEs) to be linked to external benchmarks such as repo rate or the treasury yields from April 1, 2019. It will become difficult for banks to lure customers with lower rates and then raise rates surreptitiously.
This means banks have the liberty to fix loan rates based on the present pricing system, but once fixed, its linked to an external benchmark announced by RBI. For instance, if it is pegged to the repo rate, whenever that rate changes, it will reflect in interest rates. Banks will not be able to change your inte
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However, banks worry this would lead to rise in cost of funds as deposit rates are fixed at higher rates of interest, while lending rates would trend downwards. This could also result in the deposit being pegged to an external benchmark and result in a floating rate rather than a fixed rate of deposit.
“Such a move could imply a regime change in interest rate structure, with a switch over to a real-time flexible system,” said SBI Ecowrap, the economic newsletter from the State Bank of India, adding, “However, the move may also imply a floating interest rate structure, otherwise there would be significant asset-liability mismatch for banks. In a developing country such as India that has a limited social security system in place, this could be self-defeating.”
Banks largely fund themselves through retail deposits and only around 1 per cent of bank borrowings at the policy rate of 6 per cent. “Further, the share of public deposits has a preponderance of CASA (Current Account, Savings Account) (41% approximately) that is mostly interest rate agnostic in India with an average interest rate of around 3.5%. Deposits are at a fixed interest rate for the duration of their tenure. Thus, when they say repo rate changes by 25 basis points, even under full transmission, there could be at most a 15 basis point impact on deposit rate,” SBI Ecowrap said.
In the present structure, retail loans are benchmarked against the one-year MCLR (Marginal Cost Based Lending Rate). MCLR is the floor rate below which banks are not allowed to lend. So based on the cost of funds, banks have a number of MCLRs for one month, one year, and so on.
“Our funds,” says Prashant Kumar, chief financial officer of SBI, “are mostly deposits which have a fixed rate of interest. So we need to study how an external benchmark will affect our cost of funds.”
Banks now follow a gamut internal benchmarks too, such as Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate and Marginal Cost of Funds based Lending Rate (MCLR). RBI said that the final guidelines to link the interest rate to external benchmarks will be issued by the end of December.
RBI said that this would ensure transparency and ease of understanding of loan products by borrowers. It added that banks must adopt a uniform external benchmark.
standard move
Floating interest rate loans to be pegged to external benchmark
Micro and small enterprises to get transparent pricing


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