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RBI proposes new method to benchmark floating rate of loans for MSMEs

RBI proposes new method to benchmark floating rate of loans for MSMEs

In a bid to ensure greater transparency, Reserve Bank has proposed that floating interest rates on personal, home, auto and MSMEs loans be linked to external benchmarks like repo rate or treasury yields.

RBI said that the final guidelines to link the interest rate to external benchmarks will be issued by the end of this month.

Currently, banks follow system of internal benchmarks, including Prime Lending Rate, Benchmark Prime Lending Rate, Base rate and Marginal Cost of Funds based Lending Rate. The new system is likely to become operational by 1st April 2019.

RBI has said that the banks should decide the benchmark rate system to be followed right at the inception of the loan and it should remain unchanged through the life of the loan.

It added that adoption of multiple benchmarks by the same bank will not be allowed within a loan category.

As a step in that direction, it is proposed that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 shall be benchmarked to one of the following:

  • Reserve Bank of India policy repo rate, or
  • Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
  • Government of India 182 days Treasury Bill yield produced by the FBIL, or
  • Any other benchmark market interest rate produced by the FBIL.

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