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The share of outstanding loans linked to external benchmarks increased from as low as 2.4 per cent during September 2019 to 28.5 per cent during March 2021, contributing to significant improvement in monetary policy transmission on the back of persisting surplus liquidity conditions, according to an article in the Reserve Bank of India’s monthly bulletin.
Notably, the outstanding loans (linked to both fixed and floating interest rates) in personal and micro, small and medium enterprise (MSME) segments accounted for 35 per cent of the outstanding loans as at end-March 2021, the article “Monetary Policy Transmission in India: Recent Developments” said.
Quarterly periodicity in re-setting interest rates for outstanding loans linked to external benchmark as against annual for MCLR (marginal cost of funds based lending rate) linked loans has contributed to the improvement in pass-through to lending rates on outstanding loans, opined RBI officials Avnish Kumar and Priyanka Sachdeva.
The article said monetary policy transmission is a process through which changes in the Central bank’s policy rate are transmitted to the real economy in pursuit of its ultimate objectives of price stability and growth.
External benchmark
RBI mandated all scheduled commercial banks (excluding regional rural banks) to link all new floating rate personal/ retail loans and floating rate loans to micro and small enterprises (MSEs) to an external benchmark with effect from October 1, 2019. This was extended to medium enterprises, effective April 1, 2020.
The external benchmark could be the policy repo rate or 3-month T-bill rate or 6-month T-bill rate or any other benchmark market interest rate published by the Financial Benchmarks India Private Ltd (FBIL).
Internal benchmark for pricing of loans
The authors emphasised that legacy of internal benchmark linked loans (Benchmark Prime Lending Rate, base rate and MCLR) – which together comprised 71.5 per cent of outstanding floating rate rupee loans as at March-end 2021 – impeded transmission. The share of loans linked to MCLR stood at 62.9 per cent as of March 2021.
“The opacity in interest rate setting processes under internal benchmark regime hinders transmission to lending rates, although the EBLR regime is indirectly also leading to moderate improvement in transmission to MCLR based loan portfolio,” the authors said.
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