Reserve Bank of India’s monetary policy committee on Thursday lowered its interest rate by 0.25%, triggering hope that it may lead to a reduction in EMIs for people who have home or vehicle loans. In the past, this hope has not been realised because banks use opaque internal benchmarks for floating rate loans. To ensure retail borrowers get a fair deal, RBI in December had announced that by April 2019 banks would have to shift to external benchmarks for floating rate loans.
The aim is to bring transparency and let the market decide the interest rate. Even though India has transitioned from a system of administered interest rates to market-determined interest rates, retail borrowers are stuck in the past. This is entirely on account of banks being allowed to operate in an opaque manner. Attempts to introduce transparency in setting the benchmark on floating rate loans have failed.
However, by insisting that banks set the benchmark according to an external market-determined rate, RBI has created the ground for an important reform in the retail market. If the recent decision to lower interest rates by MPC is to transmit to the retail borrower’s EMI, RBI must follow through and ensure banks follow the relevant regulation.
via For lower EMIs, RBI needs to ensure banks follow its regulation