Loans Could be Cheaper with External Lending Benchmark
Sep 17, 2018 Home Loan
Interest rates set by banks has always been a grey area for borrowers. Despite the Reserve Bank of India (RBI) setting up policy benefits, lenders do not pass these benefits to their customers. Therefore, RBI has enforced a new benchmark to set rates in the annual report of 2017-18. Hence, banks cannot ignore this any more of depriving the customers of these benefits.
Banking regulator may replace the marginal cost of fund-based lending rate. RBI has set an internal panel that had recommended to link bank’s lending rates with the external benchmark in September 2017. This may ultimately reduce the overall rate of interest for the loan.
Banking regulator may replace the marginal cost of fund-based lending rate. RBI has set an internal panel that had recommended to link bank’s lending rates with the external benchmark in September 2017. This may ultimately reduce the overall rate of interest for the loan.
Earlier Practices
Before 2010, banks used to lend money to their customers by using Benchmark Prime Lending Rate (BPLR). Since the year 2010, base rate system was operational which was replaced with MCLR introduction in the year 2016. The introduction of MCLR was an idea to benefit customers from these policy changes. Such amendments are annoyed once in every two months by the Central Bank. However, MCLR failed to achieve this target where customers are benefitted. It has been observed that both BPLR and MCLR are not in line with global policies and practice.
New Amendments
The internal panel has recommended a new external lending benchmark to be introduced so that lenders are forced to pass on benefits to the borrowers. The proposal from the panel is to introduce three lending benchmarks (Treasury Bill Rate, Certificate of Deposit Rate and policy of repo rate of RBI)that can be tied to lending rates to enhance policy transmission. Also, deposits would be linked to one of these benchmarks.
Itwe witnessed that MCLR rates had reduced from 9.15 percent to 8.10 percent between September 2016 and 2017. During this period, the 91-day treasury bill rates had reduced from 6.52 percent to 6.11 percent. And the repo rate had come down from 6.5 percent to 6 percent. Despite lowering monetary policy rates, banks have several other factors to keep the lending rates high. To address such issues, lending rates need to be tied to external benchmarks, like in other countries, creating transparency for borrowers. So, the customers can compare two loans and decide whichever is at a lower spread.
As per the report, the panel had also recommended that the rates are reset every quarter against current annual reset system. Lenders can decide upon the spread over the external benchmark, although this spread would be fixed through loan terms.
Itwe witnessed that MCLR rates had reduced from 9.15 percent to 8.10 percent between September 2016 and 2017. During this period, the 91-day treasury bill rates had reduced from 6.52 percent to 6.11 percent. And the repo rate had come down from 6.5 percent to 6 percent. Despite lowering monetary policy rates, banks have several other factors to keep the lending rates high. To address such issues, lending rates need to be tied to external benchmarks, like in other countries, creating transparency for borrowers. So, the customers can compare two loans and decide whichever is at a lower spread.
As per the report, the panel had also recommended that the rates are reset every quarter against current annual reset system. Lenders can decide upon the spread over the external benchmark, although this spread would be fixed through loan terms.
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