Money & Banking

Banks get a breather on external benchmark of floating rate loans

Our Bureau Mumbai | Updated on April 04, 2019 Published on April 04, 2019

The RBI has given banks a breather on external benchmarking of new floating rate loans. The central bank said it will hold further consultations with stakeholders and work out an effective mechanism for transmission of rates

The new lending regime, requiring banks to link new floating rate to personal or retail loans (housing, auto) and floating rate loans to micro and small enterprises with one of the four external benchmarks – repo rate, or 91-day Treasury Bill yield; or 182-day Treasury Bill yield, or any other benchmark produced by Financial Benchmarks India Private Limited – was to come into effect from April 1.

“Taking into account the feedback received during discussions held with stakeholders on issues such as management of interest rate risk by banks from fixed interest rate-linked liabilities against floating interest rate linked assets and the related difficulties, and the lead time required for IT systems upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates,” said the RBI in its Statement on Developmental and Regulatory Policies.

“The RBI’s move will give some relief to banks. It would have been a challenge for them to offer floating rate loans when their liabilities carry fixed interest rate,” said S Ravi, a practising Chartered Accountant and banking expert.

Last month, State Bank of India (SBI) said it would link savings bank deposits with balances over ₹1 lakh and all cash credit accounts and overdrafts with limits above ₹1 lakh to the repo rate with effect from May 1, in the wake of the RBI’s December 2018 proposal to usher in the external benchmarking of new floating rate loans.

India’s largest bank will link SB deposits with balances above ₹1 lakh to the repo rate, with the current effective rate being 3.50 per cent per annum (2.75 per cent below the current repo rate of 6.25 per cent).

Published on April 04, 2019
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