Subject category:
Finance, Accounting and Control
Published by:
Amity Research Centers
Length: 6 pages
Data source: Published sources
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Abstract
The case is designed for a classroom discussion on prevailing Marginal Cost of Funds-based Lending Rate (MCLR) regime in India and how the central bank of the country, the Reserve Bank of India (RBI), aimed to implement external benchmarking of interest rates regime. Targeted at the post graduate students in Commercial Banking and Financial Management subjects, the case captures how banks price their loans based on the internal benchmarking rates and major issues with such regime as borrowers hardly get any benefits of policy rate cuts announced by the RBI time-to-time. By linking lending rate to external benchmark (such as, RBI's Repo rate, 91 Day Treasury Bill, 182 Day Treasury Bill or other appropriate benchmark interest rates produced by the Financial Benchmarks India Pvt Ltd), loan products with floating interest rates will become transparent for the borrowers. However, initially announced to be implemented from April 1st 2019, RBI had officially announced to postpone the implementation till further notice due to technical difficulties faced by banks. According to banking experts, in India, banks pay fixed interest on deposits; hence, moving to market benchmark-linked loan pricing would result into huge asset-liability mismatch for the banks. In such a scenario, once implemented, would external benchmarking of loans trigger volatility for banks in India?
Teaching and learning
This item is suitable for undergraduate courses.Time period
The events covered by this case took place in 2019.Geographical setting
Region:
Asia
About
Abstract
The case is designed for a classroom discussion on prevailing Marginal Cost of Funds-based Lending Rate (MCLR) regime in India and how the central bank of the country, the Reserve Bank of India (RBI), aimed to implement external benchmarking of interest rates regime. Targeted at the post graduate students in Commercial Banking and Financial Management subjects, the case captures how banks price their loans based on the internal benchmarking rates and major issues with such regime as borrowers hardly get any benefits of policy rate cuts announced by the RBI time-to-time. By linking lending rate to external benchmark (such as, RBI's Repo rate, 91 Day Treasury Bill, 182 Day Treasury Bill or other appropriate benchmark interest rates produced by the Financial Benchmarks India Pvt Ltd), loan products with floating interest rates will become transparent for the borrowers. However, initially announced to be implemented from April 1st 2019, RBI had officially announced to postpone the implementation till further notice due to technical difficulties faced by banks. According to banking experts, in India, banks pay fixed interest on deposits; hence, moving to market benchmark-linked loan pricing would result into huge asset-liability mismatch for the banks. In such a scenario, once implemented, would external benchmarking of loans trigger volatility for banks in India?
Teaching and learning
This item is suitable for undergraduate courses.Settings
Time period
The events covered by this case took place in 2019.Geographical setting
Region:
Asia