RBI Makes External Benchmark Based Interest Rate mandatory for certain categories of loans from October 1, 2019

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.

RBI 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, based on the consultations with stakeholders, RBI 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.

RBI instructions contained in Master Direction on Interest Rate on Advances issued vide DBR.Dir.No.85/13.03.00/2015-16 dated March 03, 2016 are amended as under. As per the new directives the following changes shall take place:

(a) 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 External Benchmarks:

- 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.

(b) Banks are free to offer such external benchmark linked loans to other types of borrowers as well.

(c) 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.

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.

Some of the sub-paragraphs of para 4(a) of the Master Direction stands amended as given hereunder:

(ii) All floating rate loans, except those mentioned in Section 13, shall be priced with reference to the benchmark indicated in chapter III.

(iv) When the floating rate advances are linked to an internal benchmark rate, banks shall determine their actual lending rates by adding the components of spread to the internal benchmark rate.

(vi) Interest rates on fixed rate loans of tenor below 3 years shall not be less than the benchmark rate for similar tenor and shall be as per directions contained in Section 13(d)(v).

There shall be no lending below the benchmark rate for a particular maturity for all loans linked to that benchmark.

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.

For a full read of Master Circular please click on the link :Master Direction - Reserve Bank of India (Interest Rate on Advances) Directions, 2016 (Updated as on September 04, 2019)

State Bank of India (SBI) was the first bank to launch a repo-linked lending rate (RLLR) home loan, subsequently, several other banks have already launched similar repo-linked lending rate product. Presently, effective from September 1, 2019, the SBI repo linked lending rate (RLLR) is 7.65 per cent. The effective RLLR linked home loan, however, will depend on the loan amount, loan-to-value of the loan and the risk group of the borrower. For loan up to Rs 75 lakh, the home loan interest rate will vary between 8.05 per cent and 8.20 per cent, depending on the risk group.

Other Banks to follow suit are Union Bank of India and Central Bank etc.

In Union Bank of India initially the Repo Linked Lending rates (RLLR) will be available for Home loans and Vehicle Loans which will be known as Union Home - Repo and Union Miles - Repo. The interest rates for Union Home Repo and Union Miles Repo are as under:

Central Bank of India said it will be offering repo-linked interest rate (RLIR) on home and vehicle loan products with immediate effect.

The lender said the existing borrowers will also be given an option to switch over to the new repo-linked interest rate at a fee, a statement said.

It will continue to offer home loan and vehicle loan products linked to MCLR.

Source: rbi.org.in, Business Line & Liv Mint

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