The Reserve Bank of India’s (RBI’s) mandate asking banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark from 1 October is credit negative for domestic banks, Moody’s Investors Service said on Tuesday.
“This is a credit negative for India’s banks as it will limit their flexibility in managing interest rate risk,” Moody’s said in a report.
The RBI mandate, announced on September 4, is aimed at improving transmission of interest rates. It said the transmission of policy rate changes to the lending rate of banks under the current marginal cost of lending rates (MCLR) framework has not been satisfactory.
RBI has cut the repo rate by 110 basis points from 6.5% to 5.4% since January. With RBI cutting the repo rate, the expectation was that bank lending rates will also come down. However, that hasn’t happened, with most banks holding on to their lending rates.
Lenders have been allowed to choose between RBI’s repo rate, government of India’s three-month treasury bill yield published by the Financial Benchmarks India Private Ltd (FBIL), government’s six-month treasury bill yield published by the FBIL or any other benchmark market interest rate published by the FBIL.
According to Moody’s, under the new regime, while the floating rate loan book will get re-priced, only the non-CASA (current account savings accounts) deposits will see a re-pricing on…