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RBI To Ensure Transmission Of Rate Cut Benefits

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RBI To Ensure Transmission Of Rate Cut Benefits

Banks are mandatorily asked to link floating rate loans to RBI’s repo rates, three-month or six-month treasury bill yields, or any benchmark rate provided by FBIL

It is mandatory for all banks to link floating rate loans extended to retail and small business to the repo rate or to treasury bill rates from October 2019. Repo rate is the rate at which lenders borrow from the RBI. A few days back the public sector banks had announced a slew of repo-linked loans following a push from Finance Minister Nirmala Sitharaman. 

RBI ordered that floating rate loans for housing, auto and other personal advances as well as those advanced to micro and small enterprises should be linked to one of the three external benchmarks rather than Marginal Cost of Lending Rate (MCLR). These benchmarks include the RBI’s repo rate, three-month or six-month treasury bill yields, or any benchmark rate provided by Financial Benchmarks India (FBIL) which is a money market service provider which publish debt market rates.

The first to offer repo-linked home loans and deposits was SBI. Eventually, other PSBs started following the same pattern which includes IDBI Bank, Bank of India, Union Bank of India, Central Bank of India, United Bank of India and Allahabad Bank, among others. Many lenders are also offering repo-linked saving deposits. 

RBI clarified that the existing loans and credit limits linked to the MCLR/Base Rate/prime lending rate would continue till repayment or renewal. The central bank declared that customers who want to switch to the repo-linked rate can do the same on ‘mutually acceptable terms’. The existing benchmark which is the MCLR was incapable of transferring the rate reduction announced by RBI to borrowers. 

When the RBI announced 35 basis points cut in repo rate in August, it pointed out that in spite of the total reduction of 75 basis points, the weighted average MCLR of banks had come down by only 29 basis points. Banks, on the other hand, claimed that the MCLR formula is calculated based on the cost of funds and these come down only gradually after a repo rate cut.

SBI’s repo-rate linked home loan was priced at 8.05 percent which is sharply lower than the MCLR-linked home loan. The RBI is further expected to cut rates owing to the economic slowdown. While the external benchmark was first proposed by former governor Urjit Patel,  banks had objected to this claiming that the cost of funds did not move in line with markets. As a result, the directive which was to be implemented with effect from April 2019 was suspended. 

Source: TOI

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