Home loan linking to market

RBI or reserve bank of India is redirecting the banks from December 5 to link the lending rates with the external lending benchmark for the April 1. This will result in home loan borrowers soon will not have anything to complain about opacity which will be surrounding the interest rates.

There is a status quo maintained by RBI on key rates in the 5th monthly, monetary policy review. In a separate note, RBI said that all new personal, micro, retail, and small enterprise loans should be linked to one among the 4 market benchmarks form next year April. Now the bank gets chance to link their rate of lending to any of the available 4 benchmarks.

This proposal comes with a reason to ensure the best transparency when it comes to lending rates by the banks. In a later stage, the final guidelines for this will get issued by RBI.

What happened till date?

In the current situation, banks are offering funds which are based on the lending rate. When the rates get reduced by the RBI, the rate which is followed by the banking regulator in lending money for scheduled banks, new customers can only get the benefit out of this.

The old borrower must have knowledge on this to get benefited. He should go and ask the lender to pass the benefit. Without any obligation, the banks will pass the benefit to this borrower. Banks usually do not perform the reset on the loans till some specific period. Even though it is mentioned in the loan agreement, even after reduction by RBI they will not do this immediately.

Things to keep in mind:

Even if the bank decides to lower the rates on the loan after the RBI’s reduction they always make use of their master tool that is spread. This will help them in maintaining their profit margins. Along with this, they will also plan to maintain the legality of the maneuvering. Even if they increase the lending rates by a very little amount, this will definitely pass on to borrowers.

The MCLR regime is launched by RBI in the year 2016. This was aimed to enhance the transparency in the lending process.

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Lloyd Blankfein, me, the owner of cnntopnews, have a business management degree. Have 3 years of articles write.