In a bid to ensure greater transparency, Reserve Bank has proposed that floating interest rates on personal, home, auto and MSMEs loans be linked to external benchmarks like repo rate or treasury yields. In a statement issued from Mumbai yesterday, RBI said that the final guidelines to link the interest rate to external benchmarks will be issued by the end of this month.
Currently, banks follow system of internal benchmarks, including Prime Lending Rate, Benchmark Prime Lending Rate, Base rate and Marginal Cost of Funds based Lending Rate. The new system is likely to become operational by 1st April 2019.
RBI has said that the banks should decide the benchmark rate system to be followed right at the inception of the loan and it should remain unchanged through the life of the loan. It added that adoption of multiple benchmarks by the same bank will not be allowed within a loan category.