External benchmark linking should be for both lending, deposit

The mandatory linking of lending rates with external benchmark without adopting the same method to deposit rates as well might hit net interest margin of banks, a senior official said on Tuesday. The Reserve Bank of India (RBI) had recently announced its decision in favour of external benchmark linked lending rates over the existing marginal cost of funds-based lending rate (MCLR).

"Banks' NIM might be affected if only lending rates are linked," United Bank of India MD and CEO A K Pradhan said. "It is another experiment by the RBI which is expected to deliver better results than MCLR," he said.

MCLR is a tenor-linked internal benchmark, implying that the rate is determined internally by the banks depending on the period of loan repayment. The RBI had introduced the MCLR methodology for fixing interest rates from April 1, 2016.

Banks will provide the option of switching of existing loans to the new benchmark, Pradhan said, adding, UBI will charge a one-time fee of Rs 1,000 for each such request..

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