RBI Directs Banks to Link Loan Rates to External Benchmark

The Reserve Bank of India on 4th September, 2019, has made it mandatory for banks to link all new floating rate loans with an external benchmark from 1st October, 2019. Existing loans and credit limits linked to the Marginal Cost of Funds based Lending Rate (MCLR), Base Rate or Benchmark Prime Lending Rate (BPLR) should continue till repayment or renewal.

• Banks will have an option to benchmark the loans either to the RBI policy repo rate, Government of India three months or six months Treasury bill yields or any other benchmark market interest rate published by the Financial Benchmarks India Pvt. Ltd.
• The new rule will be applicable to floating rate loans to retail, personal and MSME borrowers but banks are free to offer such external benchmark-linked loans to other types of borrowers as well. Housing finance companies (HFCs) and NBFCs have not been brought under the ambit of this regulation.
• Borrowers will be eligible for switchover to external benchmark without any charges/fees, except reasonable administrative/ legal costs. The final rate charged post switchover should be same as the rate charged for a new loan of the same category, type, tenor and amount.
• The interest rate under the external benchmark shall be reset at least once in three months.