Mandatory to link bank loan rates to benchmark: RBI

The RBI said interest rates under external benchmark shall be reset at least once in three months.
Reserve Bank of India (File Photo | PTI)
Reserve Bank of India (File Photo | PTI)

MUMBAI: THE Reserve Bank of India (RBI), which has been nudging banks to transmit policy rate cuts, has finally made linking of bank lending rates to an external benchmark mandatory. Effective October 1, banks have to link all new floating rate personal or retail loans, and floating-rate loans to MSMEs, to an external benchmark, an RBI circular issued on Wednesday said.

“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 (Marginal Cost of Funds based Lending Rate) framework has not been satisfactory,” RBI said, pointing out as to why it had to issue a circular making it mandatory.

The RBI said interest rates under external benchmark shall be reset at least once in three months, and existing loans and credit limits linked to the MCLR base rate shall continue till repayment or renewal, as the case may be. Banks are free to offer external benchmark-linked loans to other types of borrowers. But it has asked them to adopt a uniform benchmark within a loan category—“the adoption of multiple benchmarks by the same bank is not allowed within a loan category”.

While State Bank of India took the lead to move towards Repo Rate-linked loans and savings banks bulk deposits, after the August credit policy, many public sector banks had started moving towards Repo-linked rates. “The banks are free to choose one of the several benchmarks indicated in the circular. The 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.

The external benchmarks banks can follow are RBI’s Repo rate, Government of India three-month Treasury Bill yield, six-month Treasury Bill yield, or any benchmark interest rate published by Financial Benchmarks India Private Ltd.

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