RBI asks banks to link lending rate to external benchmark

The RBI on Wednesday asked banks to link all new floating-rate loans for housing, personal and micro, small and medium enterprises (MSMEs) to specified external benchmarks, including repo, for faster transmission of reduction in interest rate to borrowers. It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds based lending rate (MCLR) framework has not been satisfactory, the Reserve Bank of India (RBI) said in a statement.

"The RBI therefore has today issued a circular making 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 1, 2019," it said. The interest rate under external benchmark shall be reset at least once in three

months, it said. About dozen banks have already aligned their lending rate with the repo rate of the RBI.

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