How your home and auto loans are priced will change from April 1. Banks have been mandated by the RBI to link floating interest rates for retail home, auto and micro and small enterprises’ or MSE loans to external benchmarks like repo rate or treasury yields from April 1. The new norms will help in faster pass-through of a change in interest rates in the financial system to borrowers, say analysts. “Currently, linked with MCLR and driven by a bank’s capital structure, pass-through of interest rates has been always lagged," investment firm Dolat Capital Market says in a note.

New home, auto loan rules: What they mean for you

1) The move to external benchmarking of floating interest rates was suggested by a committee set up by the RBI to review the working of the current MCLR or marginal cost of funds-based lending rate based loan pricing system. Under the MCLR regime, loans are priced based on banks’ internal benchmarks like cost of deposits. Floating rate home loans, for example, are typically re-priced on a periodic basis. If your loan is on a 1-year MCLR, it will be reset in 1 year.

2) But in the new system, from April 1, banks have to benchmark retail floating rate loans such as auto and home loans to any one of these four external benchmarks: RBI’s repo rate, 91/182 Treasury Bill yield or any other benchmark market interest rate produced by Financial Benchmarks India Pvt Ltd (FBIL). Banks at their discretion will charge a spread/margin over the benchmark rate.

3) But this spread will remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change as agreed upon in the loan contract.

4) For the borrower, the new system will bring in more transparency, RBI deputy governor NS Vishwanathan said. Commenting on the new pricing system PK Gupta, managing director of SBI, said: “Most of the retail portfolios like personal loans and auto loans are fixed rate loans, and, therefore, there will be no change. However, the external benchmark will be applicable to our housing loan book, which is currently under the MCLR regime, akin to a majority of our total loan book."

On the other hand, there could be more volatility in interest rates that borrowers pay as the benchmarks would be linked to the repo rate, or 91/182 treasury bill yield, say analysts.

Coming to banks, the lenders that have A lean cost structure (or higher proportion of low-cost deposits) are likely to be better placed, says Dolat Capital Market.

5) The new system of pricing of loans will apply to new floating rate retail loans (such as housing and auto loans) and floating rate loans to micro and small enterprises extended by banks from April 1, 2019. The final guidelines for new pricing of loans will be released by the RBI by the end of this month.

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