New Delhi, December 5: The Reserve Bank of India on Wednesday mandated the use of external benchmarks for pricing of retail loans, including home and auto loans. The new norms are applicable for new floating rate personal or retail loans (housing, auto) and floating rate loans to micro and small enterprises (MSMEs) by banks. The new benchmarks for pricing of loan rates from April 1, 2019.
The external benchmarks recommended by the central bank include RBI’s policy repo rate, Government of India’s 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or Government of India 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL. RBI Keeps Repo Rate Unchanged at 6.5 %, Reserve Repo Rate at 6.25% in Monetary Policy Review.
The existing system of internal benchmarks for pricing on retail loans comprises of Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate, and Marginal Cost of Funds based Lending Rate (MCLR).
The RBI made it clear that banks at their discretion can charge a margin or spread over the benchmark rate “but it will remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract".
In order to ensure transparency and standardisation of loan products, the RBI said, "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 RBI will release final guidelines for new pricing of loans by the end of December 2018.