Re­tail, MSME loans to have repo/T-bill-based rates from April

Financial Chronicle - - POLICY REVIEW - LAXMIKANT KHANVILKAR

The RBI pro­posal to bench­mark all new float­ing rates for re­tail and MSME loans with ex­ter­nal rates--like repo rate and trea­sury bills—from April 2019 is marginally nega­tive for banks but will bring in trans­parency and stan­dard­i­s­a­tion in loan prod­ucts, an­a­lysts said.

“It is marginally nega­tive, it doesn’t change the way the busi­ness is done by banks,” said Sid­darth Puro­hit, se­nior bank­ing an­a­lyst, SMC Global Se­cu­ri­ties.

Karthik Srini­vasan, group head-fi­nan­cial sec­tor rat­ings, Icra, said the move may im­prove the trans­parency in loan pric­ing by banks as the ex­ist­ing bench­marks have not led to a full trans­mis­sion of the ben­e­fits of de­cline in cost of funds for banks’ to bor­row­ers.

Fur­ther­more, the prof­itabil­ity of lenders may see a higher volatil­ity, un­less they are able to raise float­ing rate de­posits linked to ex­ter­nal bench­marks. On the other hand, for the bor­row­ers, it may lead to more re­sets on EMIs.

RBI pro­posed bench­mark­ing of new float­ing rate loans by lenders with repo rate, 91-day or 182-day trea­sury bill or any other rate pro­duced by the Fi­nan­cial Bench­marks In­dia.

This will pro­vide lenders with the op­tion to fix the rate at their dis­cre­tion and by link­ing the same with ex­ter­nal rate such as repo rate there would be trans­parency in the rate that lenders are charg­ing to a cus­tomer, ex­perts said.

The move to link re­tail and mid, small and mi­cro en­ter­prises (MSME) loans to mar­ket bench­marks will bring trans­parency of credit at the grass­roots level, which is a very wel­come step, said V S Parthasarathy, CFO, Mahin­dra Group.

The re­tail and MSME loans of­fered by lenders from April 2019 will be bench­marked to ex­ter­nal rates com­pared to the in­ter­nal bench­marks, which will help in faster trans­mis­sion of pol­icy rates to the bor­row­ers.

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