RBI Press Release – RBI Circular on External Benchmark Based Lending

On 4th of September 2019, RBI released a circular on its official website concerning the linking of interest rates on floating rates loans to an external benchmark. This move was taken for faster transmission of its rate cuts (RBI monetary policy) to consumers. We will discuss this RBI news/RBI Press Release on External Benchmark lending rates here in this blog. 

RBI Press Release – September 4, 2019

The Reserve Bank of India on 4th of September 2019 has asked Banks in India to:

“To link, all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises (MSEs) extended by banks to external benchmarks, with effect from 1st October 2019.”

RBI Press Release: History of the Decision Taken

• Reserve Bank had constituted an Internal Study Group (ISG) to examine various aspects of the Marginal Cost of Funds-based Lending Rate (MCLR) System.
• The final report of the ISG was published in October 2017 for public feedback.
• The ISG observed that internal benchmarks such as the Base Rate/MCLR have not delivered effective transmission of monetary policy. The Study Group had, therefore, recommended a switchover to an external benchmark in a time-bound manner.
• It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory.

What is Floating Interest Rate?

Floating Interest Rates or Variable Interest Rates is an interest rate that varies (moves up or down) and is typically linked to an index or a reference rate or a benchmark rate. It refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. 

What is a Floating Rate Loan?

In business and finance, a floating rate loan (or a variable or adjustable-rate loan) refers to a loan with a floating interest rate. The total rate paid by the customer varies, or “floats”, in relation to some base rate, to which a spread or margin is added or subtracted. 

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