Interest on home, auto, MSE loans to be linked to new benchmarks from April 1

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 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.

It further said that banks are free to offer such external benchmark-linked loans to other types of borrowers as well. "In order to ensure transparency, standardisation and ease of understanding of loan products by borrowers, a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category," the RBI said.

In another decision, the RBI issued final guidelines regarding stipulating a mandatory loan component in working capital finance for borrowers.

With a view to promoting greater credit discipline among working capital borrowers, the RBI had earlier proposed to stipulate a minimum level of 'loan component' in fund-based working capital finance for larger borrowers.

It had also issued draft guidelines in this regard.

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The RBI's statement also said final guidelines regarding board of management in Primary (Urban) Co-operative Banks (UCBs) will be issued during the month.

An expert committee headed by Y H Malegam had recommended that a Board of Management (BoM) be constituted in every UCB, in addition to the Board of Directors (BoD) with a view to strengthening governance in the UCBs.