The Reserve Bank of India (RBI) has already stated that an external benchmark will replace the PLR (Prime Lending Rate), Base Rate, BPLR (Benchmark Prime Lending Rate) and MCLR (Marginal Cost of Funds based Lending Rate). This indicates that rates of interest for home loans, personal loans and vehicle loans. This external benchmark will either be the policy repo rate of the RBI or the 91 day Treasury Bill yield of the Government of India that is produced by the Financial Benchmarks India Private Limited (FBIL) or the Government of India 182 days Treasury Bill yield produced by the FBIL or any other FBIL benchmark market interest rate.
This new regulation will be implemented from April 2019 and as per experts, this will be beneficial for borrowers. The cost of funds for banks are not anchored currently against such external benchmarks. Once banks anchor their lending rates to such external benchmarks, this will lead to higher transparency. Long-term loans usually have floating rates which can change depending on market circumstances while short term or unsecured loans usually have fixed rates. As a result, they may be unaffected by the external benchmarks. As a result, lending rates and EMIs may not change greatly for customers.
Short-term loans like personal loans and credit lines with short durations may witness higher benefits in comparison to long-term loans. MCLR for PSBs is usually near the 9% threshold while external benchmarks will be rounded off at 7.5% or likewise. Interest rates may be lowered marginally and may be immune towards sudden market fluctuations.