The Reserve Bank of India’s (RBI) endeavour to improve monetary transmission to banks’ lending rates have gained traction with the advent of EBLR regime and is expected to strengthen further in case of both deposits and loans, said an article in the central bank’s monthly bulletin.

“The earlier internal benchmark-based lending rate regimes suffered from a multitude of issues such as arbitrariness in calculation of the base rate/MCLR and spreads; long reset clauses which inhibited efficient monetary transmission,” said an article on Monetary Transmission to Banks’ Interest Rates: Implications of External Benchmark Regime in RBI’s April bulletin.

The RBI, however, pointed out that views expressed are those of the authors and do not necessarily represent the opinion of the central bank.

The improvement

The framework for pricing of loans under an external benchmark system improved the extent and pace of adjustment in lending and deposit rates in response to changes in policy repo rate, the article said. The EBLR system has also accelerated the pass-through to MCLR-linked loans, as changes in the benchmark rates lead banks to proactively adjust their deposit rates to protect their NIMs, thereby improving transmission to overall lending and deposit rates, it further said.

“Looking ahead, the proportion of loans linked to external benchmarks is expected to increase further along with a commensurate fall in the internal benchmark linked loans,” the article highlighted. “Coupled with shorter reset periods, monetary transmission can, thus, be expected to strengthen further in case of both deposits and loans,” it said.