The Reserve Bank of India (RBI) will not extend the October 1 deadline for banks to introduce repo-linked loan products, even as the regulator is open to reviewing the new anchor rate as time progresses, sources familiar with the RBI's working said.
“Nothing is cast in stone, except the October 1 deadline,” said a source.
The RBI has been experimenting with the lending rate format of banks, generally called anchor rate, since 1994, when the directed lending system was wound down, and the rates were let to be decided by competition. The idea has always been that policy rate transmission must get reflected in banks' rates. Since 1994, the central bank introduced prime lending rate (PLR), then benchmark PLR (BPLR), which was subsumed by base rate, and then marginal cost-based lending rate (MCLR), and now external benchmark-linked lending rate.
While public sector banks (PSBs) have declared that they would be linking their retail (housing and auto) and MSME (micro small and medium enterprises) loans to an external benchmark, mainly the RBI's repo rate, there has been murmurs that they are not enthused about such a product.
Private sector banks have not offered any such product as of now, they will have to do it from October 1.
Housing Finance Companies (HFCs) and non-banking finance companies (NBFCs) don’t fall under the ambit of the guidelines as they don't have firm-mandated anchor rates like banks do. However, that may change as they are being regulated by the RBI. Of course, bringing HFCs under an anchor rate is not an immediate priority for the central bank.
The RBI is of the opinion that banks already have enough flexibility to introduce a repo-linked loan product, even after considering that the deposit rates are not linked to a floating rate. At the same time, the RBI also looks at innovative deposit products, such as fixed-flexi deposits, in the line of what the State Bank of India (SBI) chairman recently suggested with some suspicion.
Depositors are also unlikely to be enthused about floating rate deposit products. In the past, such products have failed miserably. Unless the entire banking system introduces floating rate deposit products as a mandatory item, it is unlikely that a particular set of banks can get acceptability for such products, say analysts.
"The only way out could be that floating rate deposits be given tax breaks. Otherwise, it won't get acceptability," said an analyst.
The RBI's logic is that in the earlier system banks have many components, such as business strategy and operating cost that could be adjusted to absorb the repo rate action, and, therefore, suppress the transmission. But under the new regime, the banks will have flexibility to change the spread every three years, but will have to pass on the rate action at least every quarter when the rate is reset every at least three months. The RBI is not micro-managing the banks, but they have all the flexibilities to fix the loan rate, according to the source.
“What the RBI has done is that all the costs have now been hived off to the spread. The lending rate would no longer be a cost-plus model, which has its own inefficiencies. So, the final interest rates won't be endogenous to the bank, but exogenous of it,” said the person, requesting anonymity.
Analysts said while there was not enough market instrument to hedge floating rate risks, it should develop as the external benchmark-linked loans become mainstream.