Money & Banking

Link floating rate loans for medium enterprises to external benchmark: RBI

Mumbai | Updated on February 26, 2020 Published on February 26, 2020

The Reserve Bank of India (RBI), on Wednesday, said all new floating rate loans to medium enterprises extended by banks from April 1will have to be linked to an external benchmark. The central bank said this move is with a view to strengthen the monetary policy transmission.

Banks can link the loans to one of the four external benchmarks – RBI’s policy repo rate; Government of India 3 months Treasury Bill yield; 6 month Treasury Bill yield; and any other benchmark market interest rate published by the Financial Benchmarks India Private Ltd.

With effect from October 1, 2019, banks are required to link all new floating rate personal or retail loans (housing, auto) and floating rate loans to Micro and Small Enterprises (MSEs) extended to external benchmarks.

Subsequent to the introduction of an external benchmark system, the monetary policy transmission has improved in respect of the sectors where new floating rate loans have been linked to the external benchmarks, the RBI said. A majority of banks have preferred to use the repo rate (the interest rate at which the RBI provides liquidity to banks to overcome short-term liquidity mismatches) for all new floating rate personal/ retail and MSE loans.

As against the cumulative reduction in the policy repo rate by 135 basis points (bps) since February 2019, the one-year median marginal cost of funds-based lending rate (MCLR) declined by 55 bps during February 2019 and January 2020.

In its last bi-monthly monetary policy statement, the RBI said the weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans by 13 bps during February-December 2019.

“Transmission to the credit market is gradually improving.....Monetary transmission in terms of a reduction in lending rates and financial flows to the commercial sector has progressed vis-à-vis the last policy, and this could spur both consumption and investment demand,” the RBI said in the policy statement.

Published on February 26, 2020
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