Loans those with floating rate option including the home loan, SME and automobile loan which are for a longer period are set to get cheaper. This is because the RBI has asked banks to all such loans with external benchmark which enable better policy rate transmission in comparison.
In doing so banks have been allowed to choose any of the external benchmark say for instance repo rate and even the spread can vary as per the bank's discretion. The other options available to banks include three-month T-Bill, six-month T-Bill or any other FBIL benchmark.
It is to be noted that banks hesitate in passing of rate cut benefit to borrowers and the move will bridge any such gap in times to come.
Also, after the move is implemented, the loan rates will be reset every 3 months.
Nonetheless, for the same the banks will also need to come up with a deposit product whose interest rate keep fluctuating such that there results no asset liability mismatch.
For the existing floating rate customers, there will be no additional charges other than administrative or legal fees when switching to new external benchmarking rates.
Notably, the credit risk can be adjusted only if there is a change in the credit quality of the borrower.