Its a good news for borrowers. The way your home loans, auto loans and personal finance loans are priced is set to change from April 1, 2019. The Reserve Bank of India has mandated banks to use external benchmarks for such new loans given on a floating rate, in a bid to improve transparency.
Currently, the banks price loans based on the marginal cost of funds-based lending rate (MCLR), or a base rate, or the prime-lending rate, which are essentially internal benchmarks. A common grouse among borrowers has always been that banks are slow in passing interest rate cuts to customers, while raising lending rates at a quicker pace.
A move to external benchmark for price loans was first recommended by the report of the internal study group chaired by Janak Raj, which reviewed the working of the MCLR system. The report had been released for public feedback in October 2017.
The RBI has proposed that all new floating rate personal or retail loans—like housing loans or auto loans, and floating rate loans to micro and small enterprises extended by banks from April 1, 2019—shall be benchmarked to either the repo rate or Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Pvt Ltd (FBIL) or Government of India 182 days Treasury Bill yield produced the FBIL or any other benchmark market interest rate produced by the FBIL.
“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,” the central bank said.
The spread or the margin that can be charged over the benchmark rate has been left at the discretion of the bank at the beginning of the loan. However, it will remain unchanged through the life of the loan, unless the borrower's credit assessment undergoes a substantial change, RBI added.
The final guidelines on the issue are to be released by the end of December.
