If you are planning to take a personal, housing or vehicle loan, then you must keep in mind that any loan taken from October, 1, 2019, will be benchmarked to four external benchmarks as specified by the Reserve Bank of India (RBI). On September 4, 2019, the RBI issued a circular stating that banks, both private and public sector units, have to benchmark the interest charge on loans on the following:
Understanding the benchmarking process: When a bank lends money to a borrower under any loan category, it charges an interest rate on the basis of standards or methodologies prescribed by the RBI. Before this circular, banks used Marginal Cost-based Lending Rate (MCLR) to arrive at their lending rate. Prior to this, it was the Base Rate method and the Benchmark Prime Lending Rate (BPLR). All these methodologies were internal and not market-driven.
The apex bank had constituted an Internal Study Group (ISG) to examine various aspects of the existing Marginal Cost of funds-based Lending Rate (MCLR) system. The final report of the ISG was published in October 2017 for public feedback. The ISG observed that internal benchmarks such as the base rate/MCLR have not delivered effective transmission of monetary policy to end borrowers. The study group had, therefore, recommended a switchover to an external benchmark in a time-bound manner. You must understand that external benchmarks are market-driven, and translate into faster policy rate transmission to end borrowers.
If you are existing borrower, then you have to approach the bank for switching the existing loan from MCLR to external benchmarks. As per the RBIs circular, in the case of loans which do not have a prepayment penalty, borrowers can switch to benchmark-based lending without any additional charges. But, a borrower has to pay for administrative and legal costs.
Repo rate changes: In the last six months, the RBI had reduced its policy rate by 110 basis points (bps), including a reduction of 35 bps in August. But banks were reluctant to pass the benefits of the reduction in repo rates to borrowers. Till August 2019, a mere 29 bps in rate cuts was provided to borrowers. With the new benchmark process, a borrower can enjoy lower interest rate whenever there is a reduction in the policy rate by the RBI. Most PSU banks have already started providing personal, home loans and vehicle loans which are directly linked to RBI’s repo rate.
EMI to be reset after every three months: As per the RBIs circular, interest rate linked to an external benchmark has to be revised after every three months. The aim of this decision is to ensure that policy transmission occurs at a faster speed. As the banks have to compulsorily reset interest rates, once every three months, this will ensure faster policy transmission for majority of end borrowers.
If you are looking for a personal loan to fund any high-value goal or meet any emergency expenditure, you must consider the personal loans available on Finserv MARKETS. Here you can easily get a personal loan up to Rs 25 lakh with a slew of convenience features, like easy online application and minimal documentation. A personal loan on Finserv MARKETS comes with complete transparency and zero hidden costs. Finserv Markets, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!