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RBI makes it mandatory for banks to link retail, SME loans to external benchmark

Existing loans linked to the MCLR, Base Rate or BPLR will continue till repayment or renewal.|
Last Updated: Sep 04, 2019, 09.39 PM IST|Original: Sep 04, 2019, 07.42 PM IST
Mandatory to link loans for housing, autos, MSEs to external benchmark: RBI to banks
Mandatory to link loans for housing, autos, MSEs to external benchmark: RBI to banks
With a view to allowing faster transmission of rate cuts to consumers, the Reserve Bank of India on Wednesday said banks must mandatorily link retail and SME loans to an external benchmark from October 1.

The central bank observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the MCLR framework had not been satisfactory.

“The RBI, therefore, has made 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,” the central bank said in a filing.

Existing loans and credit limits linked to the MCLR/base rate/BPLR will continue till repayment or renewal.

Interest rate under external benchmark will be reset at least once in three months, the apex bank said.

According to RBI, banks are free to choose one of the several benchmarks. However, a lender cannot adopt multiple benchmarks within a loan category.

“Banks are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract,” RBI said.

Last month, RBI lowered its benchmark interest rates for a fourth straight time with a slightly bigger-than-expected 35 basis points cut.

All new retail and MSME loans shall be linked to one of the following benchmarks:
  • Reserve Bank of India policy repo rate
  • Government of India 3-months Treasury Bill yield published by the Financial Benchmarks India
  • Government of India 6-months Treasury Bill yield published by the FBIL
  • Any other benchmark market interest rate published by the FBIL.

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