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Link retail, MSME loans to external benchmark, banks told

Sep '19
Pic: Shutterstock
Pic: Shutterstock
To improve transmission of interest rates, the Reserve Bank of India (RBI) on August 4 asked banks to link lending rates on floating rate loans to borrowers belonging to retail, personal and micro, small and medium enterprises (MSME) categories to an external benchmark beginning October 1. Banks can, however, link loans to other segments of borrowers as well.

In a statement, RBI said the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds-based lending rate (MCLR) framework has been unsatisfactory.

Banks can 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.

Public sector banks like State Bank of India, Union Bank of India, Central Bank of India and Punjab National Bank have already started linking their lending rates to an external benchmark. Other banks mostly price loans under the MCLR.

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.

The move may reportedly boost sagging consumption by making new retail and MSME loans cheaper, as there are no real chances of the benchmark rates going up in the short term. (DS)

Fibre2Fashion News Desk – India

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