InvestorQ : What does it mean when the RBI says that banks will be shifting loans to external benchmarks?
Dilmini Mercia made post

What does it mean when the RBI says that banks will be shifting loans to external benchmarks?

Answer
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Dhwani Mehta answered.
12 months ago


In the recent announcements made by the Finance Minister, she had expressed her intent to push banks to price loans based on an external benchmark like the repo rate. What has been happening in the last few months is that the RBI is cutting repo rates but banks are not passing on the rate cuts to borrowers in the form of lower interest rates. Hence, the very purpose of these rate cuts by the RBI was getting defeated. The argument given by these banks is that even though the RBI has cut rates their average cost of funds is still quite high and hence they are able to only pass on part of the rates.

What the RBI has now announced is that all the banks will have to price their loans to retail borrowers and to SMEs (small and medium enterprises) based on an external benchmark like the repo rates. That will ensure that new loans get priced at lower rates and the existing loans also get priced lower, at least in case of floating rate loans. So, if you have a home loan or a car loan with a bank, you can expect lower rates on these loans from October onwards. Of course, it will still depend on the external benchmark that the banks select. Many banks are likely to opt for their deposit rates as the benchmark. In that case, unless they reduce the rate of interest offered on their deposits, your interest rate on loans may still not go down. You will have to wait and see how this works out.