small business borrowers. This is an increase from 50% at the end of FY23. In September 2019, the regulator had directed banks to link interest rates on retail loans and loans to some small businesses to the repo rate and the treasury bill yields.
This means that whenever these external benchmarks rose or fell, banks would be compelled to make a corresponding change in their loan rates, quickly passing on changes in the central bank’s repo rate to borrowers. The RBI action came after years of nudging banks which were reluctant to pass on rate cuts to borrowers but were quicker to pass on rate hikes. In the new External Benchmark based Lending Rate (EBLR) regime, banks are free to choose from the RBI policy repo rate, the three-month treasury bill yield, six-month treasury bill yield or any other benchmark market interest rate produced by the Financial Benchmarks India Pvt.
Ltd. Most banks have taken to the repo rate as their external benchmark, though. Among lenders, foreign and private banks lead the pack with over 80% of floating rate loans on external benchmarks, while state-run banks are lower than the system average at 39%.
In fact, foreign banks had 91% of their floating rate loans pegged to external benchmarks, while private banks were at 83%, showed data from RBI. Quicker transmission, while beneficial to borrowers in a falling interest rate scenario, hurts when the cycle reverses. But even as a majority of floating loans are under external benchmarks, transmission still lags changes in the repo.
Read more on livemint.com