RBI proposes to harmonise framework on interest rates on advances: Malhotra

The proposed framework seeks to standardise loan pricing, benchmark reset dates and interest calculation practices while strengthening transparency and consumer protection

The Reserve Bank of India (RBI) on Wednesday proposed to harmonise and standardise the regulatory framework governing interest rates on advances across all regulated entities (REs) to enhance transparency in loan pricing and strengthen consumer protection.

 

Speaking at the post-monetary policy press conference, RBI Governor Sanjay Malhotra said the proposal would not bring any major changes to the existing lending rate framework or require non-banking financial companies (NBFCs) to shift to the external benchmark-linked lending rate (EBLR) regime.

 

In its statement on developmental and regulatory policies, the RBI said the proposed rationalisation seeks to harmonise guidelines across REs while maintaining proportionality, address operational issues in the existing marginal cost of funds-based lending rate (MCLR) and EBLR frameworks, and standardise divergent market practices related to interest charging, including day-count conventions and benchmark reset dates.

 

The measures are aimed at ensuring greater uniformity, improving transparency in loan pricing, strengthening monetary policy transmission and enhancing consumer protection.

 

“We have introduced these rules to standardise them. This will increase transparency. People will know how the interest rates are set. This is a rationalisation exercise which will increase consumer protection,” Malhotra said.

 

“These parallel regimes need some standardization to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection. The proposed measure is steering the loan pricing policy in this direction,” SBI Report said.

 

According to a State Bank of India (SBI) report, the pricing of bank loans has evolved over time to improve transparency and monetary policy transmission. Banks followed the prime lending rate until 2010, after which they shifted to the base rate.

 

After 2016, banks migrated to the MCLR framework, which links lending rates to the marginal cost of funds. To further improve monetary transmission, the RBI introduced the EBLR regime in 2019. Currently, 67.6 per cent of bank loans are linked to EBLR.

 

“These parallel regimes need some standardisation to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection. The proposed measure is steering the loan pricing policy in this direction,” the SBI report said.