External benchmark-based lending rates increased by ICICI Bank and Punjab National Bank

8 Aug 2022 , 07:47 AM

After the RBI lifted the benchmark interest rate by 0.50% on Friday, two large banks–ICICI Bank and PNB–raised their lending rates. To combat excessive inflation, the Reserve Bank of India (RBI) sharply boosted the key policy repo rate, at which it lends short-term funds to banks, by 50 basis points, or 0.5%, to a three-year high of 5.40%.

Retail inflation has been over 6% for more than the previous six months in a row, stubbornly remaining high.

According to an announcement from ICICI Bank, the External Benchmark Lending Rate (I-EBLR) is a markup over the repo rate with reference to the RBI policy repo rate.

The repo, or external benchmark, linked lending rate was also raised to 7.90% by the government-owned Punjab National Bank (PNB).

PNB stated in a regulatory filing that “the Repo Linked Lending Rate (RLLR) has been revised from 7.40% to 7.90% with effect from August 8, 2022,” in response to a hike in the repo rate by the RBI.

Prior to the RBI policy rate announcement earlier this month, ICICI Bank also adjusted the marginal cost of funds-based lending rate (MCLR) by 0.15% across all tenors.

As a result, starting on October 1, 2019, banks began to connect all new floating-rate personal and retail loans (housing, auto), as well as floating-rate loans to Micro and Small Enterprises, to an external benchmark (repo).

The RBI repo rate, yields based on treasury bills published by Financial Benchmarks India Private Ltd (FBIL), or any other benchmark market interest rate reported by FBIL are all acceptable external benchmarks for banks.

The spread over the external benchmark is up to the lenders, who may also choose to extend these loans tied to the external benchmark to different categories of borrowers.

According to instructions from the RBI, the interest rate used as the external benchmark must be changed at least once every three months.