Time To Formalise Linking Lending Rates With External Benchmarks, Says RBI Governor Shaktikanta Das 

Reserve Bank of India Governor Shaktikanta Das said the “time has come to formalise linking of lending rates of new loans to external benchmarks like the repo rate”.

The central bank has cut interest rates four times this year but the transmission of the same by banks to borrowers has lagged. In all, the central bank has cut interest rates by 110 basis points this year.

Das said banks have started linking certain lending rates to repo rates after the August policy but the central bank expects them to “move faster.” He was speaking at the annual banking summit ‘FIBAC 2019’ organised by the Indian Banks’ Association and FICCI.

In December 2018, the RBI had proposed mandatory linking of floating rate retail loans to an external benchmark like the repo rate. The new rules, which were intended to come into effect from April 1, 2019, were later deferred.

Speaking after the August Monetary Policy Review, Das had suggested that a market-driven move towards external benchmarking of retail loans is preferable over a regulatory diktat. His comments on Monday, however, suggest that the RBI may consider making this mandatory over a period of time.

Baby Steps By Banks

So far, banks have approached the linking of loans to an external benchmark with caution.

State Bank of India was the first to move in that direction by linking savings accounts with a balance of more than Rs 1 lakh to the RBI’s repo rate. At the same time, SBI linked working capital loans to the policy benchmark as well. More recently, the lenders has introduced repo rate-linked home loans.

“We will look to link more products to the repo rate but it depends on the behavior of liabilities. We can’t reduce (deposit) rates so much that we become uncompetitive. It’s a delicate balancing act,” said Rajnish Kumar, chairman of State Bank of India while speaking on the sidelines of the event on Monday.

A handful of other public sector lenders have also followed SBI by offering home loans and auto loans linked to the repo rate.

These rates, however, apply only to new borrowers so far.

With both the MCLR and the repo-rate linked rates existing simultaneously, a dual rate structure may emerge in the markets where new borrowers can avail of rates much lower than existing borrowers.

Sunil Mehta, chief executive officer of Punjab National Bank does not believe this will be a challenge for long. “There will be a time when the benefits will be passed on to existing loans as well,” Mehta said.

As loans linked to the 1-year marginal cost lending rate (MCLR) come up for review, they can be linked to the repo-rate, added a senior banker while speaking on condition of anonymity.