RBI drafts new lending norms, protect borrowers

The Reserve Bank on Wednesday proposed to rationalise the regulatory framework governing interest rates across all regulated entities to improve transparency in loan pricing, strengthen monetary policy transmission and bolster consumer protection.

The Reserve Bank proposes to rationalise the regulatory framework on interest rates for all regulated entities (REs) on a principle-based basis.

“To enhance transparency in lending rates and strengthen consumer protection, it is proposed to harmonise and standardise the regulatory framework on interest rates on advances for all regulated entities,” RBI Governor Sanjay Malhotra said while unveiling the third bi-monthly monetary policy review for the current fiscal.

The proposed rationalisation aims to harmonise the guidelines across REs while maintaining proportionality, address certain operational aspects of the current framework on MCLR and EBLR; and standardise certain divergent market practices concerning interest charging, including day count convention and benchmark reset dates, RBI said in its statement on Developmental and Regulatory Policies.

These measures seek to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection.

Draft directions incorporating these proposals will be issued shortly for public comments, RBI said.

For better transparency, RBI directed banks to switch to external benchmarks like repo for loans from the earlier Marginal Cost of Funds framework in 2019.

Banks were asked to link all new floating-rate loans for housing, auto and MSMEs to an external benchmark like repo from October 1, 2019, with the objective to ensure faster transmission of policy rate cuts to borrowers.

The external benchmarks, to which banks are required to link their lending rates, could be repo, 3-month or 6-month treasury bill yield, or any other benchmark published by the Financial Benchmarks India Private Ltd (FBIL).

Banks are required to reset the interest rate under the external benchmark at least once in three months.

In August 2017, the RBI had constituted an Internal Study Group (ISG) to examine the working of the MCLR system that was put in place in April 2016.

The ISG had recommended the move to an external benchmark-based lending rate system.