RBI asks banks to link retail and MSME loans to external benchmark from 1 Oct.

• RBI makes it mandatory for banks to link all new floating-rate loans for housing, auto and MSEs to repo

• Interest rate under external benchmark, like repo, should be reset at least once in 3 months, said RBI

In order to improve transmission of interest rates, the Reserve Bank of India (RBI) on Wednesday asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark from 1 October.

However, banks can link loans to other segments of borrowers as well, RBI said.

To be sure, banks have already started linking their lending rates to an external benchmark. Among these are public sector lender State Bank of India, Union Bank of India, Central Bank of India, Punjab National Bank and private sector lender Federal Bank. Other banks mostly price loans under the marginal cost of funds-based lending rate (MCLR).

The central bank said, in a statement on Wednesday, that the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory.

Banks have been allowed to choose between RBI’s repo rate, government of India’s three-month treasury bill yield published by the Financial Benchmarks India Private Ltd (FBIL), government’s six-month treasury bill yield published by the FBIL or any other benchmark market interest rate published by the FBIL.

However, a bank will have to adopt a uniform external benchmark within a loan category, meaning that the adoption of multiple benchmarks by the same bank is not allowed within a loan category.

While lenders can decide on the spread they charge over the benchmark to calculate the final interest rate, RBI said that the spread can be changed only if the credit assessment of the borrower undergoes a substantial change. The interest rate under external benchmark shall be reset at least once in three months, RBI said. (Source: The Hindu)