RBI mandates banks to link retail/MSME loans to external benchmark
Margins likely to remain volatile
In the recent announcement the government has suggested that banks will introduce repo/external benchmark linked lending products to aid faster monetary transmission, particularly on retail/MSME loans. Thus, the RBI has issued guidelines and mandated banks to link all new floating rate retail loans (housing, auto, personal loans etc.) and MSME loans to an external benchmark starting from 1st Oct, 2019. RBI has recommended external benchmarks for pricing of retail/MSME loans such as 3/6 months T-Bill, repo rate and any other market linked external benchmark all of which are better correlated to the policy repo rate.
Overall, we believe that this measure will impact margins for lenders with higher share of floating rate retail loans (more so for private banks) as deposits reprices with a lag while lending yield on underlying loan moderates. The actual impact will vary depending on the maturity profile, mix of CASA deposits and current SA rate being offered.
Banks to price floating rate loans on T-Bill/Repo rate or any other benchmark rate produced by the FBIL
* The RBI has asked banks to move all new floating rate retail & micro small enterprise loans to one of the following external benchmark –
(i) T-Bill rate on either 3/6 months,
(ii) repo rate,
(iii) any other benchmark interest rate to price such loans. We believe that this pricing mechanism will help in achieving effective monetary policy transmission but adopting this methodology will bring more volatility to spread/margins across cycles.
* Further, banks are fee to offer such external benchmark linked loans to other types of borrowers as well.
* Though banks have a choice to choose external benchmark of its own but they must adopt a uniform external benchmark within a specific loan category. This means not allowing multiple benchmarks within the same loan category.
* Currently, the SBI has already launched repo rate linked home loans followed by BOB. SBIN now offers home loan in the range between 8.05%/8.20%, BOB at 8.35% while one year MCLR for large private lenders is in the range of 8.25%- 8.55%. Thus, the lending yields will also moderate for private banks under the new pricing mechanism on floating rate retail and MSME loans.
Banks to decide on spread charged over external benchmark under the new pricing mechanism
* Banks are free to decide the spread charged over the external benchmark however the credit risk premium charged can only be changed when the borrower’s credit assessment undergoes a substantial change. Further, other component of the spread like operating cost can be altered once in three years.
* The loan rates shall be reset at least once in three months.
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