Banking wrap: RBI makes external benchmarking mandatory for banks, private lenders may see impact on margins

The Reserve Bank of India (RBI) has made it compulsory for banks to link their new floating rate home, auto and MSME loans to an external benchmark from October 1, so that the borrowers can enjoy lower rate of interest.

The move will lead to lower interest rates on a set of loan products when RBI cuts policy rate in future. However, private banks that were reluctant to pass on the rate cuts earlier may see a contraction in their net interest margins.

This the third new interest rate setting framework that the regulator has introduced in the past decade.

The existing framework of Marginal cost-based lending rate (MCLR) was introduced in April 2016 with the same objective-to speed up policy rate transmission to end borrowers. However, rates remained sticky as response to policy rate cuts came with a lag.

What is external benchmarking and how does it affect you if you are planning to get a new loan or already have one? Read up to find out how the new rule affects your finances.

Indian lenders, especially private, that have been reluctant to pass on the benefit of low policy rates to borrowers, will witness a contraction in their Net Interest Margins (NIMs) as borrowers migrate to the new rate regime.

While the mandate is not applicable to Housing Finance Companies (HFCs), their margins may also come under pressure. It will be challenging for banks to link the liabilities side to external benchmark and only linking asset side would lead to asset-liability mismatches.

Running a payments bank from kirana stores and a mobile app may have cracked the code for this erstwhile payments technology company that focuses primarily on financial inclusion.

Launched in 2017, Fino Payments Bank is looking at ending this financial year with operating profits on the back of its variable cost-based business model.

Fino Payments Bank aims to double its customer base and merchant points by December 2020. It expects 40-50 percent growth in transaction volumes next year.

Moving ahead with its plan to enable visually impaired people identify currency notes, RBI has selected a vendor to develop a mobile phone based application for them.

The RBI on September 6 had told the Bombay High Court that an internet connection would not be required for its proposed mobile application which would help visually impaired people identify currency notes.