RBI announced of linking interest rates of home, auto, MSE loans to new benchmarks like repo rate, treasury yields from April 1

The RBI on Wednesday suggested that floating interest rates on personal, home, auto and micro, and small enterprises (MSEs) loans will be linked to repo rate or treasury yields (external benchmarks), from April 1 next year. This step is taken to ensure more transparency. Currently, banks follow a system of internal benchmarks like Marginal Cost of Funds based Lending Rate (MCLR), Benchmark Prime Lending Rate (BPLR), Base rate and Prime Lending Rate (PLR). The final instructions to link the interest rate to external benchmarks will be issued by the end of this month, said by 'Statement on Developmental and Regulatory Policies' of RBI. The proposal of shifting external benchmarking of floating interest rate was given by an internal study group set up by the RBI to review the working of the MCLR System.

The RBI said that a bank must adopt a uniform external benchmark within a loan category to ensure transparency, standardization, and ease of understanding of loan products by borrowers. The RBI also issued final guidelines regarding a condition of mandatory loan component in working capital finance for borrowers.

The RBI had initially proposed to stipulate a minimum level of 'loan component' in fund-based working capital finance for larger borrowers to promoting greater credit discipline among working capital borrowers, draft guidelines are also issued in this regard. Statement of RBI also suggested that final guidelines regarding board of management in Primary or Urban Co-operative Banks (UCBs) will be issued during the month. An expert council headed by Y H Malegam had proposed that a Board of Management (BoM) be constituted in every UCB, in summation to the Board of Directors (BoD) to strengthen the governance in the UCBs.