Reserve Bank of India Governor Shaktikanta Das today indicated that the regulator will soon formalise linking of lending rates to an external benchmark, a move aimed at aiding faster transmission of policy rates by banks.
Speaking at the annual FICCI-IBA conference, FIBAC 2019, Shaktikanta Das said, "I think the time has now come to formalise this linking of the lending rates on new loans to external benchmarks like the repo rate. We are monitoring the developments in this regard and whatever steps are required in the coming weeks, the RBI will be initiating."
State Bank of India Chairman Rajnish Kumar today said that new loans would be linked to repo rates, adding that the bank would mull extending repo-linked loans to existing customers as well. "Once I have funds available at a variable rate, it is about asset-liability matching", Kumar said, and that going forward, "more and more products will be linked to an external benchmark."
State Bank of India was one of the first banks to link its short-term loans and large savings deposits rates to the RBI's repo rate earlier this year, followed by linking of home loan rates earlier this month.The bank's lending rates for home loans linked to MCLR (marginal cost of funds-based lending rate) stand at 8.35-8.90 per cent for loans up to Rs 75 lakh. SBI's RLLR (repo linked lending rate) is 2.25 percent over repo rate. Therefore, if SBI does extend the external bench-marking for existing customers, interest rates could go down (5.40 percent repo rate + 2.25 percent RLLR) to as low as 7.65 percent plus spreads of 40-55 bps depending on risk profile of customers.
Sunil Mehta, MD & CEO of Punjab National Bank, told CNBC-TV18 that PNB is also working on linking certain loans to an external benchmark. "We may announce certain retail-\products linked to repo rates this week," Sunil Mehta said. Mehta also added that the bank would consider applying this to existing customers as well.
In the last Monetary Policy Committee meeting earlier in August, the Governor had noted that while RBI had cut repo rate by 75 bps (until the June policy), banks had only transmitted 29 bps cut to customers. Since the 35 bps repo rate cut in the August policy however, several public sector banks have cut rates by anywhere between 15-25 bps over and above the previous rate cuts.
While public sector banks are inclined to consider external benchmarking, their private banking peers aren't as keen.
Rajiv Anand, ED Wholesale Banking at Axis Bank, explained that external benchmarking isn't the only way to meet the objective of faster transmission of rate cuts. "What the RBI is really looking at is to ensure that when rates are cut there is faster transmission into the economy... even with an MCLR environment, the transmission will certainly be much faster than you've seen so far," he said.
"As long as banks are able to meet the requirement to transmit faster, I think there are multiple roads to achieve that... repo rates will typically be more volatile than MCLR, and customers on the retail side would not want to see that kind of volatility," Anand added.
V Vaidyanathan, MD & CEO of IDFC First Bank, however said, "We have not yet thought it through...I think the system is gradually looking into it, and everybody is concerned and conscious about it" when asked if IDFC First Bank would consider linking its lending rates to an external benchmark.
"We have kept the external benchmark (guidelines) in abeyance because we wanted to see how the market evolves. It is a positive trend that the banks have responded but this process needs to be faster," Shaktikanta Das noted.