Monetary Policy: RBI Again Defers Rollout Of External Benchmark For Lending Rates

The Reserve Bank of India said it will hold further consultations with banks before it rolls out guidelines for linking retail floating rate loans to an external benchmark. The regulator had earlier said these rules, aimed at improving transmission of monetary policy, would kick-in starting April 1, 2019.

The RBI said it has taken into account the feedback received from stakeholders on the difficulties in managing interest rate risk by banks if such a policy is introduced. Banks believe that linking assets to an external benchmark without linking liabilities would lead to difficulties in interest rate management.

The regulator also said that banks need time for upgrading IT systems.

According to the RBI's December monetary policy announcement, lenders had time till April 1 to link their lending rates on loans to individuals and small businesses to an external benchmark. The move sought to avoid opaque decisions by bankers that impacted the transmission of policy rates. The marginal cost-based lending rate, base rate and benchmark prime lending rates were based on the bank's cost of funds.

While the RBI said it would release final guidelines by December-end, Shaktikanta Das, who took as governor after Urjit Patel stepped down, later said the regulator had only prepared draft guidelines.

The banking industry has opposed the external benchmark, arguing that it would bring undue volatility. The Indian Banks' Association made representations to the RBI citing the difficulties in implementation, highlighting that while deposit rates are fixed, lending rates will be linked to an external benchmark.

So far, only State Bank of India has announced a framework for linking the rates on current and savings account deposits, and some working capital loans to the RBI's repo rate. Private sector lender Federal Bank Ltd. also offers floating interest rates linked to an external benchmark to some of its retail customers.