In a move that is likely to bring relief to the prospective home loan and auto loan borrowers, the Reserve Bank of India (RBI) has made it mandatory to link all new floating rate personal or retail loans (housing, auto, among others) and floating rate loans to Micro and Small Enterprises to the external benchmarks.
The rule, which will be implemented from October 01, 2019, will make it mandatory to link such loans to either of: policy repo rate, the government of India three-Months or six-month treasury bill yield published by the Financial Benchmarks India Private Ltd (FBIL) or any other benchmark market interest rate published by the FBIL. External benchmark rate means the reference rate which includes any of the four metrics.
However, the banks are free to decide the spread over the benchmarks, according to the RBI circular issued on Wednesday said.
In a downward interest scenario -- a phenomenon seen globally right now -- move may bring down the cost of home loans and auto loans drastically. The move is also expected to help boost the credit flow to the ailing MSMEs. Many brokerage firms expect continuous cut in the policy rates throughout the current financial year after GDP growth decelerated to a 25-quarter low. The analysts expect the repo rate to be cut anywhere between 40 and 60 basis points by the end of the FY20.
However, all floating rate rupee loans sanctioned and renewed between July 1, 2010, and March 31, 2016, shall be priced with reference to the Base Rate which will be the internal benchmark for such purposes.
All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016, shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes, the circular said.