The RBI has made it mandatory for banks to link retail loans like housing and automobile loans to an external benchmark. The regulation will take effect on October 1, 2019.

According to an RBI circular, the banks are free to choose one of the several indicated benchmarks. The banks are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when the borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.

The central bank has observed that the transmission of repo rate changes by banks under the current regulatory framework is unsatisfactory.

The interest rate will be reset at least once in three months. Existing loans and credit limits linked to the MCLR/Base Rate/BPLR will continue till repayment or renewal.

First Published:Sept 4, 2019 7:53 PM IST