Changes that may happen:
When the lending rates get aligned with the market benchmark, banks may lose all the private capacity for using spread. This would have helped to keep lending agreement at best interest rates.
This is the reason bank will have to maintain single spread throughout a loan tenure. This will continue till that borrower qualifies for a right full earning of a revision by becoming credit risk or by defaults on his loan. After this new regime comes on the way, the EMI of the borrower may outgo. There will be changes as the rates vary or they go up and down. This will also help in tracking the outstanding liability and this makes it simpler.
The linking may also affect the floating rate of the deposits in the system. Experts say that this linking of the loan to the external benchmark may lead to an increase mainly in the prevalence of the floating rates.
Small business and people buying homes, cars on credit basis will have to experience some change by next year. This is due to this linking of loans to the market benchmark. When the reserve bank of India decides to reduce the key rates at some point then people who purchased cars or home will have a chance to cheer. At this point, banks will have to align all the outstanding loans into one common benchmark. Along with this, they will have to maintain spread to the entire firm. This should be continued till there is a change in borrower’s credit risk.
So, from the financial year 2019, even central banks have announced that they will be linking all the new floating rates personal, MSMEs, and even retail loans too available four external benchmarks which are suggested. In this situation even if a particular bank decides on reducing the rates on a particular loan they should make use of their master tool. This will also help them in maintaining the profit margins as well. Moreover, this will also help them in maintaining the legality when we consider the maneuvering.
Lloyd Blankfein, me, the owner of cnntopnews, have a business management degree. Have 3 years of articles write.