In a bid to ensure greater transparency, the RBI Wednesday proposed that floating interest rates on personal, home, auto and micro and small enterprises (MSEs) loans will be linked to external benchmarks like repo rate or treasury yields, from April 1 next year.
Currently, banks follow system of internal benchmarks, including Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR).
The final guidelines to link the interest rate to external benchmarks will be issued by the end of this month, said the RBI’s ‘Statement on Developmental and Regulatory Policies’.
The proposal to shift to external benchmarking of floating interest rate was suggested by an internal study group set up by the RBI to review the working of the MCLR System.
“…It is proposed that all new floating rate (for) 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 repo rate, or 91/182 Treasury Bill yield or any other benchmark market interest rate produced by the Financial Benchmarks India Pvt Ltd (FBIL).
“The spread over the benchmark rate – to be decided wholly at banks’ discretion at the inception of the loan – should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract,” the RBI said.