Linking loans to external benchmark: Why it won't be easy for banks

Banks in India are not wholesale-funded entities as in developed markets, but deposit-taking. Only a percentage of their books is linked to borrowing at the repos window

“Yields on external benchmarks like treasury-bills (T-Bills) fluctuate ­­­daily. It will complicate pricing on loans,” says Prashant Kumar, chief financial officer and deputy managing director of State Bank of India (SBI). It is Kumar’s way of mildly putting it across that the devil (as is usual) lurks in the detail even as banks double-down to pass on Mint Road’s policy rate cuts to customers.

A host of state-run banks have announced that they will offer loans to both retail customers and micro, small and medium enterprises or MSMEs linked to the repos rate, effective October 1. SBI, which had launched