From October 1, 2019, banks will have to link new personal loans, auto loans, home loans and MSME loans offered at floating rate to repo rate. This will reduce the interest rates and the new loan will become cheaper. However, this will not have any impact on the repayment of the existing loan.
The Reserve Bank issued a statement on Wednesday saying, “It has been observed that under the current MCLR framework, following the change in policy rate for different reasons is not satisfactory as the lending rate of banks. Hence RBI has issued a circular making it mandatory for banks to link all new personal or retail loans (housing, auto like loans) offered at floating rate and MSME loan with an external benchmark from October 1, 2019. You can choose from any external benchmark given in this circular.
The new system, which comes into effect from October 1, will have to fix its lending rates on the basis of bank repo rate or yield on treasury bills of the government. Banks have to review the lending rates every three months.
The Reserve Bank announced on December 5 last year that the RBI intends to link all personal loans or retail loans of banks offered at floating rates and MSME loans to the external benchmark. RBI had also said in April this year that it would consult with all parties before taking any decision in this regard. After this, RBI has now taken this step. By now, eight banks have linked their lending rates to the repo rate.
In This Way, Understand The Rules of New Home And Auto Loan
RBI said that all existing home and auto loans linked to MCLR / Base Rate / BPLR will continue till reparations or renewals are done. The rate of interest for retail loans is linked to the fund cost of the bank based on the marginal cost of funds or MCLR regime.
Under the floating rate loan scheme, existing borrowers, who can repay the loan without pre-payment charges, can switch to the loan linked to the new external benchmark without any fees / charges except administrative / legal costs.
The final rate is charged to borrowers who have switched to a new loan linked to an external benchmark, the rate will be the same for new loans as well.
The RBI has issued a circular directing banks to link all loans given at floating rate to one of these three external benchmarks instead of MCLR. Banks have been asked to choose either the RBI’s repo rate, 3-month or 6-month Treasury Bill Yields or any benchmark rate provided by Financial Benchmarks India (FBIL).
However, banks must follow a uniform external benchmark within a particular loan category.
Banks have the freedom to decide on the external benchmark for new floating auto and home loans.
Banks have to review the lending rates every three months.