Following the RBI’s 0.50 percent increase in the benchmark interest rate on Friday, two major banks, ICICI Bank and PNB, raised their lending rates.
To combat high inflation, the Reserve Bank of India (RBI) raised the key policy repo rate (the rate at which it lends short-term money to banks) by 50 basis points, or 0.5%, to a three-year high of 5.40%.
Retail inflation has remained stubbornly high at more than 6% for the past six months in a row.
According to a notification, the ICICI Bank External Benchmark Lending Rate (I-EBLR) is referenced to the RBI policy repo rate with a mark-up over the repo rate.
“I-EBLR is 9.10% p.a.p.m. (per annum payable monthly) effective August 5, 2022,” said the private sector lender.
The repo, or external benchmark, linked lending rate, was also raised to 7.90% by the state-owned Punjab National Bank (PNB).
“As a result of the RBI’s increase in the repo rate, the Repo Linked Lending Rate (RLLR) has been revised from 7.40% to 7.90% with effect from August 8, 2022,” PNB said in a regulatory filing.
ICICI Bank also revised its marginal cost of funds-based lending rate (MCLR) by 0.15 percent across all tenors earlier this month, ahead of the RBI policy rate announcement.
According to a 2017 report by the RBI’s internal study group, internal benchmark rates such as base rates or MCLRs were not effectively transmitting the central bank’s monetary policy repo rate decisions. It then advised switching to an external benchmark.
As a result, beginning October 1, 2019, all new floating rate personal and retail loans (housing, auto), as well as floating rate loans to Micro and Small Enterprises, were linked to an external benchmark (repo).
Banks can use the RBI’s repo rate, the government’s treasury bill-based yields published by Financial Benchmarks India Private Ltd (FBIL), or any other benchmark market interest rate published by FBIL as an external benchmark.
Lenders are free to set the spread over the external benchmark and to make such external benchmark-linked loans available to other types of borrowers.
The interest rate under the external benchmark is supposed to be reset at least once every three months, according to RBI guidelines.