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With about a dozen banks recently announcing plans to link their lending rates to the repo rate, the Reserve Bank of India (RBI) now wants the entire banking system to move faster on this front to ensure better transmission of repo rate changes to lending rates.
After the RBI cut the repo rate from 5.75 per cent to 5.40 per cent on August 7, banks such as Canara Bank, Union Bank of India, Central Bank of India, Syndicate Bank, and Andhra Bank announced that they would be launching products linked to this rate.
Effective May 1, State Bank of India became the first bank in the country to link all Cash Credit Accounts, and Overdraft Accounts with limits over ₹1 lakh to the repo rate. It followed this up by coming up with a Repo-Linked Home Loan Product with effect from July 1.
Referring to banks’ response to linking their lending rates, especially in respect of new loans, to the repo rate and other external benchmarks as positive, Governor Shaktikanta Das said at the FIBAC 2019 banking summit that this process needs to be faster because today the economy requires a certain kind of push not just from the monetary policy but also from its transmission.
“I think the time has now come to formalise the linking of the lending rates on new loans to external benchmarks like the repo rate. We are monitoring developments in this regard and whatever steps are required in the coming weeks, the RBI will be sort of initiating the necessary steps.
“But I am happy to note that after the last Monetary Policy Committee, where we reduced the policy rate by 35 basis points, on the same day and thereafter, various banks have announced initiatives to link their lending rates in respect of new loans to the repo rate. Our expectation is that they should move faster,” the Governor said. He emphasised that the RBI will definitely play its role as a regulator to work with banks to see the trends in the market and take steps that can formalise the linking of new loans to repo rates or to external benchmarks.
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