Rate transmission and loan restructuring

Subject: Economy

Context:

Central Board of the Reserve Bank of India (RBI) met through video conferencing and discussed the economic scenario, impact of the RBI measures and interest rate transmission but did not take up the proposal to restructure the loans of borrowers hit by COVID-19 pandemic.

Concept:

Rate transmission

• It is the process through which RBI’s policy actions reach its effective end goal of tackling inflation and addressing growth concerns.
• The RBI earlier ordered banks to link the interest rateswith an external benchmark. Under the order, benchmarking was to be done to one of the following:
• Reserve Bank of India policy repo rate
• Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
• Government of India 6-Months Treasury Bill yield published by the FBIL
• Any other benchmark market interest rate published by the FBIL.
• The rationale behind external benchmarking is that the prevailing mechanism inefficient in delivering monetary transmission.

Debt restructuring

• Restructuring is a practice that allows banks to modify the terms of the loan when the borrower is facing financial stress.
• Banks do that to avoid the borrower being declared a defaulter and the loan having to be classified as a non-performing asset.
• It could be through a change in the repayment period / repayable amount / number of installments / rate of interest/ additional loans.