RBI tweaks rules for interest rates on loans

Reserve Bank of India (RBI) has tweaked its norms on the new method of loan rate calculation by banks asking lenders to use the so-called marginal cost of funds calculation for even fixed rate loans up to three years.

  • The new interest rate calculation which is set to be adopted by banks from April 1, links banks’ loan rates to new deposits and is aimed at ensuring that lending rates are linked directly with RBI interest rate moves.
  • The new norms were released in December and had initially provided for exempting all fixed rate loans. The new norms say only fixed rate loans above three years will be exempt.
  • Banks can also use balances of deposits of up to seven days prior to the new rate setting to calculate the new interest rate a change from considering deposits only as on the previous day.
  • In a note Religare Capital Markets analysts Parag Jariwala and Vikesh Mehta said restricting the exemption of the new interest rate calculation to fixed rate loans of only above three years will be negative for banks.

The new rules would thus force lenders to adjust their lending rates based on market rates, removing some of the sector’s discretion in deciding how much to charge for loans.

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