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Indian central bank asks banks to link retail, SME loans to external benchmark

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Indian central bank asks banks to link retail, SME loans to external benchmark

The Reserve Bank of India is requiring banks to link retail, small and midsize enterprise loans to an external benchmark to allow for the faster transmission of rate cuts.

The central bank said it has observed that the transmission of policy rate under the current marginal cost of fund-based lending rate system has not been satisfactory. It is now 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 Oct. 1.

The banks can choose one of the several benchmarks: the RBI policy repo rate, the 3- and 6- months Treasury Bill yield and any other benchmark published by the Financial Benchmarks India Pvt. Ltd.

Banks are free to offer such external benchmark linked loans to other types of borrowers as well. However, banks cannot adopt multiple benchmarks within a loan category. Banks are free to decide the spread over the external benchmark.