RBI To Formalise Linking Of Repo Rates To Loans

After the recent monetary policy meet, RBI Governor Shaktikanta Das stressed on the transmission of cuts in repo rates to interest rates charged or offered by banks. Within days, over a dozen banks, mainly from the public sector, voluntarily linked their loan and deposit pricing to repo rate, however, on Monday, Das stressed on the need for the whole system to switch to the model to speed up transmission of monetary decisions. He said that there is a need to formalise the process to push economic growth.

"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 the developments in this regard and whatever steps are required in the coming weeks, will be taken by RBI," Das said at a conclave organised by the Indian Banks' Association (IBA) and industry body FICCI.

Currently, bank loans are based on MCLR (marginal cost of funds-lending rates).

Last December, under the governorship of Urjit Patel, RBI said banks would have to link their new loans (retail and small business loans with floating rates) against an external benchmark from 1 April 2019. This decision was met with a lot of resistance from bankers over various concerns, causing Das to postpone the move.

"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," he said.

He further said that while there has been a 75 basis points cut in repo rate by the RBI in 2019 (excluding the recent 35 bps cut in August), only 29 basis points was transmitted by banks.

"The RBI will definitely pay its role as the regulator to work with the banks to see the trends in the market and take steps that can formalise these linking of new loans to repo rate or other external benchmarks," he said.