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RBI’s diktat to banks could spur borrowing but may pressure lenders’ margins (Relevant for GS Prelims & Mains Paper III; Economics)

Source: The Hindu

RBI directions to banks
The Reserve Bank of India (RBI) has finally decided that it needs to address the problem of inadequate interest rate transmission head on. In a circular to banks on Wednesday, it directed lenders to link all new floating rate loans given to borrowers in the personal, retail and micro, small and medium enterprise (MSME) categories to external benchmarks, including the repo rate, with effect from October 1.

While giving banks the relative freedom to choose the specific external benchmark, including yields on the 3-month and 6-month Treasury Bills published by the Financial Benchmarks India Pvt. Ltd., the central bank made it clear that lenders would need to adopt a uniform benchmark within a loan category.

Banks do not transmit lower interest rates to customers
In recent times Reserve Bank of India has significantly reduced the interest rates. However, banks do not pass the reduction in interest rates to the borrowers, and continue to charge interest on the same rate. Lower interest rates can play important role in boosting economy.



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