RBI mandates the use of external benchmark based interest rate for certain categories of loans

Sep 05, 2019 | by Avantis RegTech Legal Research Team


The Reserve Bank of India (RBI) on September 04, 2019, makes external benchmark for determining interest rate mandatory for certain categories of loans. Since a long time, RBI has been examining the feasibility of mandating the use of external benchmark for determining interest rate on floating rate loans. In the Statement on Developmental and Regulatory Policies dated December 05, 2018, RBI has announced its intention to make it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs.

RBI had observed that the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory. Thus, RBI makes it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark effective October 01, 2019. The banks are free to choose one of the several benchmarks as well as to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.


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