4-Sep-2019: RBI makes it mandatory for banks to link retail loans with external benchmarks

Reserve Bank had constituted an Internal Study Group (ISG) to examine various aspects of the marginal cost of funds-based lending rate (MCLR) system. The final report of the ISG was published in October 2017 for public feedback. The ISG observed that internal benchmarks such as the Base rate/MCLR have not delivered effective transmission of monetary policy. The Study Group had, therefore, recommended a switchover to an external benchmark in a time-bound manner.

As a step in that direction, it was announced in the fifth bi-monthly Monetary Policy Statement for 2018-19 under ‘Statement on Developmental and Regulatory Policies’ dated December 05, 2018, that all new floating rate personal or retail loans and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 shall be linked to external benchmarks. Subsequently, it was announced in the first bi-monthly Monetary Policy Statement for 2019-20 under ‘Statement on Developmental and Regulatory Policies’ dated April 04, 2019 to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates. Based on the consultations with stakeholders, it has now been decided to link all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks with effect from October 01, 2019 to external benchmarks.

Accordingly, RBI instructions contained in Master Direction on Interest Rate on Advances are amended as under:

  1. All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to one of the following:
  • Reserve Bank of India policy repo rate
  • Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
  • Government of India 6-Months Treasury Bill yield published by the FBIL
  • Any other benchmark market interest rate published by the FBIL.
  1. Banks are free to offer such external benchmark linked loans to other types of borrowers as well.
  2. In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category.

Spread under External Benchmark: Banks are free to decide the spread over the external benchmark. However, credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract. Further, other components of spread including operating cost could be altered once in three years.

Reset of Interest Rates under External Benchmark: The interest rate under external benchmark shall be reset at least once in three months.

Transition to External Benchmark from MCLR/Base Rate/BPLR: Existing loans and credit limits linked to the MCLR/Base Rate/BPLR shall continue till repayment or renewal, as the case may be.

Provided that floating rate term loans sanctioned to borrowers who, in terms of extant guidelines, are eligible to prepay a floating rate loan without pre-payment charges, shall be eligible for switchover to External Benchmark without any charges/fees, except reasonable administrative/ legal costs. The final rate charged to this category of borrowers, post switchover to external benchmark, shall be same as the rate charged for a new loan of the same category, type, tenor and amount, at the time of origination of the loan.

Provided that other existing borrowers shall have the option to move to External Benchmark at mutually acceptable terms.

Provided that the switch-over shall not be treated as a foreclosure of existing facility.

External benchmark rate means the reference rate which includes:

  1. Reserve Bank of India policy Repo Rate
  2. Government of India 3-Months and 6-Months Treasury Bill yields published by Financial Benchmarks India Private Ltd (FBIL)
  3. Any other benchmark market interest rate published by FBIL.

All floating rate rupee loans sanctioned and renewed between July 1, 2010 and March 31, 2016 shall be priced with reference to the Base Rate which will be the internal benchmark for such purposes.

All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes subject to the provisions contained in paragraph 7 of this Master Direction.

The periodicity of the reset under MCLR shall correspond to the tenor/maturity of the MCLR to which the loan is linked.

15-Aug-2019: Central Banks find a solution in Negative rate policy.

Some major central banks have resorted to unconventional policy measures, including a negative rate policy. Switzerland, Denmark, Sweden and Japan have allowed rates to fall slightly below zero.

Under a negative rate policy, financial institutions are required to pay interest for parking excess reserves with the central bank. That way, central banks penalise financial institutions for holding on to cash in hope of prompting them to boost lending. The European Central Bank (ECB) introduced negative rates in June 2014, lowering its deposit rate to -0.1% to stimulate the economy. Given rising economic risks, markets expect the ECB to cut the deposit rate, now at -0.4%, in September. The Bank of Japan (BOJ) adopted negative rates in January 2016, mostly to fend off an unwelcome yen spike from hurting an export-reliant economy. It charges 0.1% interest on a portion of excess reserves financial institutions park with the BOJ.

Aside from lowering borrowing costs, advocates of negative rates say they help weaken a country’s currency rate by making it a less attractive investment than that of other currencies. A weaker currency gives a country’s export a competitive advantage and boosts inflation by pushing up import costs.

But negative rates put downward pressure on the entire yield curve and narrow the margin financial institutions earn from lending. If prolonged ultra-low rates hurt the health of financial institutions too much, they could hold off on lending and damage the economy.

There are also limits to how deep central banks can push rates into negative territory - depositors can avoid being charged negative rates on their bank deposits by choosing to hold physical cash instead.

29-Jun-2018: Auction of Government of India Treasury Bills

After reviewing the cash position of the Central Government, the Reserve Bank of India, in consultation with Government of India has decided to notify the amounts for the issuance of Treasury Bills for the quarter ending September 2018.

The Reserve Bank of India/Government of India will continue to have the flexibility to modify the notified amount and timing for auction of Treasury Bills depending upon the requirements of the Government of India, evolving market conditions and other relevant factors, after giving due notice to the market. Thus, the calendar is subject to change, if circumstances so warrant including for reasons such as intervening holidays. Such changes, if any, will be communicated through press releases.