External Benchmarking Rule To Kick In From April 1: Here's The Impact

After the failure of erstwhile external benchmarking rates such as the likes of the PLR, base rate and MCLR, the RBI from April 1, 2019 will introduce a new external benchmarking rate that will be tied to the interest rate.

External Benchmarking Rule To Kick In From April 1: Here's The Impact

It was to be noted that the latest MCLR or marginal cost of lending rate did not go well with the major plan to pass on the monetary rate to the end borrowers. It was seen that as and when there was a change in the key policy rate by the MPC committee of the RBI, there was no major reflection of it in the MCLR and hence on the lending rate, and finally the EMIs of customers.

And so considering the MCLR system to be not very efficient, the apex bank is considering to move to new external benchmarking system.

Impact of new external benchmarking system on loan borrowers:

Herein banks have been the option to select the most suitable benchmark rates as that is provided in the Financial Benchmarks India such as RBI's repo rate, 91 Day Treasury Bill, 182 Day Treasury Bill or other appropriate benchmark interest rates.

Also, for pegging the interest rates to the external benchmark rates, banks can select the suitable spread over and above the external benchmark they choose. Furthermore, it is to be noted that the spread will remain fixed for the complete loan tenure.

So, with the new system in place, there will be immediate transmission in key policy rates i.e. as and when the interest rates trend downward, EMI of customers will decrease accordingly and in case the rates trend higher, customers will have to shell an higher amount towards EMI.

And this is different in the sense as it would avoid confusion for consumers as the product will be linked to a single benchmark rate as against the MCLR rate where within the same product category, the banks tie it with different underlying benchmark rates. But however, as the interest rate changes average in the long run, borrowers will not be impacted significantly.

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