External benchmarking: No extension in deadline, teaser loans not welcome

The Reserve Bank of India (RBI) is in no mood to negotiate an extension of the deadline to comply with external benchmarking of floating rate loans, a senior official said.

From October 1, banks have been mandated to link their retail and SME loans to an external benchmark. Most banks have opted for the RBI’s repo rate for the same.

When the external benchmarking framework was introduced on a voluntary basis last year, very few lenders took the initiative to adopt it. Sticky lending rates despite policy rate cuts prompted the regulator to make it mandatory for all. There is reluctance on part of the banks, especially private lenders, given the negative impact on their margins.

However, the regulator is open to reviewing other aspects of the directions such as the reset period of three years for the spread.

“Of course, this does not apply to the October 1 deadline, but generally nothing is cast in stone…we cannot be oblivious to review requirements based on facts that emerge,” the official said, adding that the regulator will not shy away from the assessment of the framework if need be.

The new interest rate regime is aimed at “unmasking” the banks’ internal costs from the anchor rate to bring in transparency and faster transmission of policy rate actions in future.

“Today, a lot of what (costs) are internal to the bank are getting into the anchor. Between two banks that have the same external benchmark, whatever the extra that bank will be charging, will be in the form of a spread over the anchor,” the official said.

As a result, banks that have a higher cost of funds will pass it on in the form of higher spreads over the benchmark and not as part of it. This translates into a proportionate increase/decrease in interest rates with the movement in the policy rate. So, while borrowers may not see an immediate fall in interest rates as of now, changes will be quicker if the regulator decides to lower rates in future.

The RBI expects competition, along with transparency, to lead to better interest rates for the borrower.

The official also said there are no plans to mandate flexible deposit rates as of now and banks have enough leeway to manage their liabilities under the new regime. Also, teaser loans are not likely to be permitted by the regulator, to protect the interests of the borrower.

The banking regulator that has recently been entrusted with the supervision of non-banking finance companies (NBFCs), is “studying” loan pricing methods in the sector, while no review is in the works as of now.

“There is need to bring in some order there first. We are examining transparency in NBFC rates. They are not in the same market as banks but we are studying the way interest rates are charged by NBFCs,” the official said.

While banks follow a mechanism for pricing of loans, NBFCs have no such guidelines in place. Due to this, there is a lot of disparity in the range of interest rates charged by NBFCs in India. For starters, the RBI is trying to bring the system on par with banks in terms of the liquidity framework, in light of the ongoing crisis.