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