Banks Asked To Link Floating Rate Loans With Benchmark Rates From October 1: 5 Points

The Reserve Bank of India on Wednesday asked banks to link certain loans to external benchmark rates from October 1. The move is set to enable a faster transmission of its key interest rates to borrowers. "It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory," the central bank said in a statement. "The RBI therefore has today issued a circular making it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark effective October 1, 2019." 

Here are five things to know about RBI's latest move: 

1. The RBI asked the banks to link all new floating rate personal or retail loans (housing, auto, etc) and floating rate loans to micro, small and medium enterprises (MSMEs) extended by banks with effect from October 1 to external benchmarks.

2. However, the central bank has allowed the banks to choose one of the several benchmarks such as the RBI's policy repo rate, the government's 3-month or 6-month treasury bill yield published by the Financial Benchmarks India Private Ltd (FBIL). Any other benchmark market interest rate published by the FBIL, can also be opted by the banks. 

3. The interest rate under external benchmark shall be reset at least once in three months, the RBI's statement added.

4. Banks are free to decide the spread over the external benchmark, the central bank noted. "However, credit risk premium may undergo change only when borrower's credit assessment undergoes a substantial change, as agreed upon in the loan contract."

5. Last month, the RBI's Monetary Policy Committee (MPC) cut the repo rate by 35 basis points or 0.35 percentage point to 5.40 per cent.