External Benchmark-Linked Loans Rise
Source : Indian Express
Economy

What is discussed under External Benchmark-Linked Loans Rise ?

1. Basic Terms
2. What is the News about ?

Why in News ?

According to an RBI report on Monetary transmission in India legacy of internal benchmark linked loans (BPLR, base rate and MCLR) together comprised 71.5 per cent of outstanding floating rate rupee loans as at end March 2021, impeding the transmission.

Basic Terms

Discussing various standards adopted by RBI from tome to time for lending.

• Benchmark Prime Lending Rate (BPLR)
  • This system of lending was adopted banks till 2010 where lending priced on the actual cost of funds.
  • Increasing the interest rate of small and medium customers the bank can subsidise the interest rate of corporate borrowers.
  • The banks set the lending rate while considering its average cost of funds.
• Base Rate : Loans taken between June 2010 and April 2016 from banks were on base rate and was the minimum interest rate at which commercial banks could lend to customers.
• What is Marginal Cost of Lending Rate (MCLR) ?
  • It came into effect in April 2016.
  • This is the minimum interest rate at which commercial banks can lend.
  • This rate is based on four components
    1. The marginal cost of funds
    2. Negative carry on account of cash reserve ratio
    3. Operating costs
    4. Tenor premium.
  • Since it is linked to deposit rates the lending rates increased with the increase of deposit rate rise.
  • The loan rates are calculated on the basis of the marginal cost of funds.
• What is External Benchmark-Linked Loans ?
  • To ensure complete transparency and standardization, RBI mandated the banks to adopt a uniform external benchmark within a loan category effective 1st October, 2019.
  • It replaces the current Marginal Cost of Funds-based Lending (MCLR) system.
  • This was done to make sure that the RBI’s action on key policy rates at transmitted in a timely and transparent manner to the end user.

Key Facts

• What is the News about ?
  • From time to time RBI changes its lending policies and interest rate were set on different standards. 
  • Recently a report by RBI the Monetary transmission in India legacy shows banks still following the old regime like BPLR, Base Rate and MCLR.
• Data collected from banks by the RBI suggests the share of outstanding loans linked to external benchmarks mostly the Repo rate which is at four per cent increased from as low as 2.4 per cent during September 2019 to 28.5 per cent during March 2021.
• The share of loans linked to MCLR stood at 62.9 per cent as of March 2021.
• Only 8.6 per cent of floating rate rupee loans were still linked to the BPLR and base rate even though the Reserve Bank had moved to MCLR based regime over five years ago.
• RBI had made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark like the Repo rate effective October 1, 2019.
• Most banks that is 38 of the 58 banks which introduced external benchmark linked loans (out of a total of 71 banks that responded to a survey) have adopted the Reserve Bank’s policy repo rate as the external benchmark for floating rate loans to the retail and MSME sectors in May 2021.
  • 28 banks in the public and private sectors and five banks have adopted sector-specific benchmarks.
  • An increasing share of outstanding loans linked to external benchmarks more so for foreign banks followed by the private sector banks.

What are the Benefits of EBLR

• BLR and the MCLR systems still did not solve the problem of low rate cut transmissions to the borrowers whenever the RBI decided to cut the repo rate.
• Under the EBLR system the RBI directed the banks to peg their floating rate loans to any of the recommended external benchmarks including the repo rate.
• Borrowers who have taken or shifted to a repo-linked loan also called a Repo-Linked Lending Rate (RLLR) loan have seen a quick revision in their loan interest rates equal to the changes in the repo rate.
• Borrower can shift to an RLLR loan from a BLR or an MCLR loan to benefit from lower EMIs whenever the RBI reduces the repo rate after factoring in the loan transfer charges, especially moving from one bank to another.

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