Will ex­ter­nal bench­mark rate be a re­al­ity?

Hindustan Times ST (Mumbai) - - WORLD - Viv­ina Vish­wanathan viv­[email protected]

MUM­BAI: If you have a loan and it is on a float­ing rate, you will know that it is linked to a bench­mark lend­ing rate which can vary de­pend­ing on the in­ter­est rate cy­cle.

In the De­cem­ber mone­tary pol­icy meet, the Re­serve Bank of In­dia (RBI) had pro­posed that all banks should link float­ing rate loans to ex­ter­nal bench­mark rate from April 1, 2019, and do away with mar­ginal cost of funds-based lend­ing rate (MCLR) to pro­vide trans­parency. The cen­tral bank had given three op­tions—pol­icy repo rate, 91 days trea­sury bill yield, 182 days trea­sury bill yield or any other bench­mark mar­ket in­ter­est rate pro­duced by the Fi­nan­cial Bench­marks In­dia Pvt. Ltd.

Cur­rently, all new loans are linked to MCLR since April 1, 2016. How­ever, the pro­posal is un­der re­view and bankers say the im­ple­men­ta­tion is chal­leng­ing.

The dis­cus­sion pa­per was placed in the pub­lic do­main re­gard­ing ex­ter­nal bench­mark rate. We have got a lot of com­ments from the pub­lic as well as from the banks. It is cur­rently un­der ex­am­i­na­tion. SHAKTIKANTA DAS, RBI gover­nor, dur­ing the lat­est mone­tary pol­icy an­nounce­ment.

EX­TER­NAL BENCH­MARK RATE STILL UN­DER RE­VIEW Last week, dur­ing the lat­est mone­tary pol­icy an­nounce­ment, the RBI said the pro­posal to link loans to ex­ter­nal bench­mark is still un­der re­view.

“The dis­cus­sion pa­per was placed in the pub­lic do­main re­gard­ing ex­ter­nal bench­mark rate. We have got a lot of com­ments from the pub­lic as well as from banks. It is cur­rently un­der ex­am­i­na­tion,” said RBI gover­nor Shaktikanta Das, dur­ing the mone­tary pol­icy an­nounce­ment.

Ac­cord­ing to bankers, shift­ing to ex­ter­nal bench­mark rate will be a chal­lenge con­sid­er­ing banks in In­dia de­pend on de­posits to lend money and de­pos­i­tors look for fixed rates. “Any de­pos­i­tor wants a fixed rate of in­ter­est. In In­dia, banks de­pend on pub­lic de­posits. If you look at the banks’ li­a­bil­ity side on bal­ance sheets, al­most 85-90% is de­posits. And rest is cap­i­tal re­serves. If you are so de­pen­dent on pub­lic de­posits and you re­move sav­ings ac­count, which is a fixed rate of in­ter­est, from there, your float­ing rate on li­a­bil­ity side will be prac­ti­cally ab­sent in bank bal­ance sheets. On the as­set side, if you move ev­ery­thing to mar­ket bench­mark-linked pric­ing, then there will be huge as­set-li­a­bil­ity mis­match for the bank. Right now, it is linked to MCLR which is linked to de­posit rates. When you have an ex­ter­nal rate, banks have to be suc­cess­ful in rais­ing float­ing rate de­posits. If I am lend­ing some­thing on say a three-month trea­sury bill, I should be able to raise de­posits linked to three-month trea­sury bills,” said Ashutosh Kha­juria, ex­ec­u­tive di­rec­tor and chief fi­nan­cial of­fi­cer, Fed­eral Bank Ltd.

The RBI gover­nor had fur­ther said the apex bank is in talks with banks for mone­tary trans­mis­sion. “When­ever there is a pol­icy rate re­duc­tion, it is RBI’S ex­pec­ta­tion that mone­tary trans­mis­sion takes place. But we have to keep in mind that the lend­ing and fix­ing of the rate of in­ter­est is a func­tion of the banks. We will be hav­ing an in­ter­ac­tion as I men­tioned in the next fort­night or so. We will have meet­ings with CEOS and MDS of all banks and we will be dis­cussing these is­sues, in­clud­ing the is­sue of mone­tary trans­mis­sion and let’s see,” Das said.

WHAT NEXT?

Though it is still wait and watch for the im­ple­men­ta­tion of ex­ter­nal bench­mark rates, two things are likely to hap­pen.

One, banks may look at opt­ing for float­ing rate de­posits to im­ple­ment ex­ter­nal-linked bench­mark rate. So, in­stead of fixed de­posit, you may have float­ing rate de­posits.

Two, if the ex­ter­nal bench­mark rate is im­ple­mented, your in­ter­est rates will change faster than usual, mak­ing your loans rates more volatile.

Also, you will have a higher spread on your home loans than the ex­ist­ing one.

It is too early to say whether it will work or not.

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