‘Linking small loans to external benchmark after further talks’

RBI factors in issues such as interest rate risk management, system upgrade

The proposal to link small floating rate loans with an external benchmark for improving monetary transmission seems to have taken a back seat, with the Reserve Bank of India (RBI) deciding to hold further consultation with stakeholders before implementing such a scheme.

“Taking into account the feedback received during discussions held with stakeholders on issues such as management of interest rate risk by banks — from fixed interest rate linked liabilities against floating interest rate linked assets — and the related difficulties, and the lead time required for IT system upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates,” the RBI said in a statement during the first bimonthly policy review of the current financial year.

Dec. proposal

During the December review of monetary policy, the RBI had proposed to implement the system of linking floating rate personal or retail loans, and floating rate loans to Micro and Small Enterprises, to an external benchmark from April 1, 2019. At present, all loans are linked to the Marginal Cost of Fund based Lending Rate (MCLR). Banks opposed the move to link loan rate to an external benchmark on the grounds that lending rates are a function of cost of funds and change in an external benchmark like repo rate does not have much impact on their cost of funds.