External benchmark for floating rate loans from Oct 1

 The Reserve Bank of India on Wednesday made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark from October 1.

The changes are in line with the RBI's recent stance that its policy rate changes should quickly result in lowering of lending rates by banks. Even though the central bank has consistently cut policy rates in last few monetary policy reviews, rate transmission process has not been satisfactory under the current MCLR framework followed by banks.

As per the changes proposed by the RBI, banks would link the identified loans rates to external benckmarks but the institutions would be free to choose from among the several benchmarks indicated by the apex bank. The banks would also be free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo changes only when borrowers credit assessment undergoes a substantial change.

The changes proposed by the RBI on external benchmark rate comes after the GDP figures showed last week that the Indian economy grew at a pace slowest in over 6 years owing to massive slowdown in private consumption.

Opposing the four MPC members who voted for a 35 bps cut, external MPC member Chetan Ghate had said that there has been inadequate monetary transmission given the quantum of past rate cuts.

At its last bi-monthly monetary policy review meeting here earlier last month, the RBI decided to cut its repo, or short-term lending rate for commercial banks, by an unprecedented 35 bps to 5.40 per cent.

The rate cut was the fourth in succession adding up to a total of 110 bps. IANS