Borrowers must watch for this even as RBI mandates banks to link loans with external benchmarks

The RBI’s recent circular has mandated the banks to link all the floating loans to retail customers and MSMEs to an external benchmark from October 1.

Even as RBI made it mandatory for banks to link all floating loans to external benchmark for better interest rate transmission, the borrowers may have something to be concerned about. The borrowers availing loans under the new regime should be ready for the frequent changes in the rates of the loans, a report said. The retail customers may now get cheaper loans in the current scenario of falling interest rates, but they may also face challenges as the rates rise, CARE Ratings said in a report. “The cost of increased interest rate volatility as the changes both lower/ higher would be reflected much faster,” it added. The housing loans segment which accounts for more than 13 per cent of the bank credit would be the most hit as it has a variable interest rate, the report noted. The other segments including vehicle or credit card loans generally have a fixed interest rate. “The banks NIMs could be squeezed to the extent of lag in lowering their deposit rates. The new dispensation could aggravate their asset-liability mismatch. Ideally both sides should be moved to similar benchmarks to ensure an appropriate operational environment,” CARE Ratings added.

The RBI’s recent circular has mandated the banks to link all the floating loans to retail customers and MSMEs to an external benchmark from October 1. The external benchmark includes repo rate, government’s treasury bill yields of 3-month and 6-month tenure published by FBIL and any other benchmark market interest rate published by FBIL.

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A report released by Kotak Institutional Equities on Thursday said that the new rule may have a greater impact on large private and all the public sector banks as against lenders such as HDFC and IndusInd Bank. In the entire banking space, ICICI Bank and Axis Bank could take bigger impact owing to the nature of their loan books.