From April 1, 2016, banks are supposed to calculate and declare the MCLR every month and are not allowed to lend below its MCLR.
The Reserve Bank of India (RBI) is holding its last Monetary Policy Committee (MPC) meeting (February 5 to 7 ) for this financial year. On the 7th February, the RBI will decide whether to maintain the status quo on the repo rate or cut it by at least a 25 basis point. With inflationary pressure still looming large and oil prices too not in the comfort zone, it is unlikely that there will be any cut this time around.
Repo rate is the rate of interest at which the banks borrow money from the RBI. Currently, the repo rate stands at 6.5 percent. If the RBI cuts the repo rate, there will be more money available with banks at lesser cost and will help keep the lending rates low.
While the borrowers — including home loan, car loan and personal loan borrowers — will rejoice any rate cut, there could also be more clarity on the loan pricing mechanism in the MPC meeting tomorrow.
Present loan pricing structure
Currently, all flexible loans are linked to the banks’ MCLR- Marginal Cost of Funds Based Lending Rate . MCLR is an internal benchmark and largely depends on the banks’ own cost of funds. Other internal benchmarks used by banks include Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR) and Base rate.
From April 1, 2016, banks are supposed to calculate and declare the MCLR every month and are not allowed to lend below its MCLR. However, they can lend at a mark-up above the MCLR. For example, if the bank’s 1-Year MCLR is 8.25 percent, the home loan rate could be 8.65 percent, after including a mark-up of 40 basis points
Loan pricing in future
In its last MPC meet in the first week of December 2018, RBI had asked banks to implement external-benchmark-based loan pricing for all floating rate retail loans. Lack of proper transmission of rates when in the past RBI reduced cost of funds by cutting the repo rate may have led RBI to look at alternate benchmarks. In a statement on Developmental and Regulatory Policies on December 5, 2018, RBI proposed that banks need to implement external-benchmark-based loan pricing from April 1, 2019.
The banks will be free to fix any of the four following benchmarks:
* Reserve Bank of India policy repo rate, or
* Government of India 91 days Treasury Bill yield, or
* Government of India 182 days Treasury Bill yield, or
* Any other benchmark market interest rate produced by the FBIL.
The banks will also be free to decide on the mark-up or the spread above the benchmark rate. However, once fixed, the spread has to remain unchanged through the life of the loan.
In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category. So, for a car loan, the bank may adopt 91 days Treasury Bill yield and for a home loan, it can be 182 days Treasury Bill yield but cannot use the different benchmark for car loan category or home loan category.
RBI had earlier stated that the final guidelines will be issued by the end of December 2018. However, those have not been issued as yet. It remains to be seen if tomorrow RBI releases the final guidelines and puts in place a more transparent mechanism for the borrowers to take advantage from.