New retail benchmarks set by RBI likely to hit profitability of banks

Change in lending rate benchmark may not aid loan book growth but increase margin volatility

Though borrowers from retail and micro, small and medium enterprises (MSME) segments will benefit from the transparent and standard lending rate structure, the same will impact profitability of banks. 

The Reserve Bank of India (RBI) on Wednesday announced the linking of all new floating retail and MSME loans to external benchmarks such as RBI’s policy rate, and yields on 91 or 182-day government treasury bills (T-bills), from April 2019. “Profitability of banks may see higher volatility, unless they are able to raise floating rate deposits linked to external benchmarks,” says Karthik Srinivasan, senior vice-president at ICRA. 

The new benchmarks are