Link bank loan rates to market rates, suggests RBI committee

MUMBAI: A panel set up by RBI on Wednesday recommended linking bank lending rates to a market benchmark in a bid to hasten monetary policy transmission as well as improve transparency in rate setting by lenders.

The committee headed by Janak Raj, principal adviser, monetary policy department, recommended that all floating rate loans advanced from April could be referenced to one of three external benchmarks.

The RBI will take a final view on the recommendations of the panel after taking into account the public feedback received until October 25.

The panel pulled up banks for “arbitrariness” in calculating the base rate and marginal cost of funds-linked lending rates, two existing benchmarks to which retail lending rates such as car loan and home loan rates are fixed.

The spreads charged over these internal benchmarks “has undermined the integrity of the interest rate setting process.”

The panel has recommended that lending rates should be reset once every quarter from the current practise of once a year.

It also suggested that banks migrate all existing borrowers who are now charged under benchmark prime lending rates, base rates or the marginal cost of funds based lending rate (MCLR) to the external benchmarked rate without any conversion fee or other charges within one year of its introduction, i.e March 2019.

Introduced in April 2016, the MCLR system replaced the base rate regime.

According to the panel, in the absence of any sunset clause on the base rate, banks were slow in migrating their existing customers to the MCLR regime. It suggested that all existing borrowers under any other system be moved to MCLR.

Since April 2016 , the one-year MCLR has come down by 95 basis points (bps) whereas the repo rate is down by 75 bps, but MCLR has been mostly used for fresh loans.