RBI’s new regime on external benchmarking of lending rates; these 2 private banks may see bigger impact

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Published: September 5, 2019 4:46 PM

The RBI on Wednesday asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark from 1 October so as to improve transmission of interest rates.

RBI Circular, home loan, auto loan, personal loan, small industry, external benchmark, repo rate, MCLR, bank loanFewer risks may be seen in the long-term if the external benchmark achieves its desired objective, the report added.

The RBI’s circular mandating banks to link their lending rates on loans to an external benchmark may have a greater impact on large private and all the public sector banks as against lenders such as HDFC and  IndusInd Bank, a report said. In the entire banking space, the impact of new regime for ICICI Bank and Axis Bank could be bigger owing to the nature of their loan books. Since the regime is being implemented on a prospective basis, the impact would be somewhat limited, the report by Kotak Institutional Equities said. “We expect more NIM volatility for large HFCs that may be prompted to increase higher-yield loans, increase short-tenure borrowings or interest rate swaps,” a report by Kotak Institutional Equities said.

The RBI on Wednesday asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark — repo rate, government’s 3-month or 6-month treasury bill yield, or any other benchmark market interest rate published by Financial Benchmarks India Private Ltd (FBIL) — from 1 October so as to improve transmission of interest rates.

Also read: After PSU banks, public insurers in trouble? National Insurance, Oriental Insurance among downgraded

“In the short term, it would a reasonable assumption to have a negative outlook on NIM as product specific MCLR rates are currently higher than repo-linked instruments,” the report added. The long-term impact of the new regime needs to be seen more closely, it noted. Fewer risks may be seen in the long-term if the external benchmark achieves its desired objective, it said.

Housing finance companies (HFCs) including HDFC Ltd, LICHF and PNBHF may see an impact of the announcement as these are not primarily fixed rate products, the Kotak report said. “HFCs may be prompted, over time, to raise more short-term borrowing (or increase interest rate swaps), increase developer loans or expand in segments with lesser competition from banks,” it added.

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