Rate transmission rate to be improved for external benchmarked loans: RBI study

According to a study by the Reserve Bank of India, the rate of transmission should improve in the future for external indexed loans as their proportion increases.

Analysts have pointed out that so far borrowers have benefited from an easing rate cycle. Today, the cycle has reversed with the rise in market borrowing rates, the adjustment to inflation, the gradual withdrawal of excess liquidity and the imminent rise in key rates. This sets the stage for a likely rise in external benchmark rates in the coming months.

The pass-through to banks’ lending and lending rates has improved considerably since October 2019. It has been facilitated by the introduction of a system of benchmark-linked external lending rates (EBLR), an accommodative monetary policy, a large excess liquidity and subdued credit demand.

RBI’s EBLR study in its April newsletter indicates that after the introduction of the scheme in October 2019, the share of personal and MSME loans increased significantly as a proportion of outstanding loans. loans linked to external references. Banks voluntarily price their loans against these benchmarks in other sectors as well.

The share of EBLR loans by banks increased from just 2.4% in September 2019 to 28.6% in March 2021 and 39.2% in December 2021, RBI said.

Weighted average lending rates (WALR) on new loans as well as on outstanding loans in rupees declined across all sectors. Banks extended the benefits to existing borrowers by cutting the WALR more than the repo rate cuts during the EBLR period.

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