Executive Summary:
This document from the Reserve Bank of India (RBI) amends the Master Direction on Interest Rate on Advances, mandating that all new floating rate personal/retail loans and floating rate loans to Micro and Small Enterprises, effective October 1, 2019, must be linked to an external benchmark. It outlines permissible external benchmarks, spread specifications, reset frequencies, and transition rules from existing MCLR/Base Rate/BPLR linked loans.
Key Points / Main Content:
External Benchmark Requirement:
* All new floating rate personal/retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises, effective October 1, 2019, must be linked to an external benchmark.
* Banks can offer external benchmark-linked loans to other borrower types.
* Banks must adopt a uniform external benchmark within a loan category.
Permissible External Benchmarks:
* RBI policy repo rate
* Government of India 3-Month Treasury Bill yield published by FBIL
* Government of India 6-Month Treasury Bill yield published by FBIL
* Any other benchmark market interest rate published by FBIL
Spread and Reset of Interest Rates:
* Banks can decide the spread over the external benchmark.
* Credit risk premium can change only with substantial credit assessment changes, as agreed in the loan contract.
* Other spread components, including operating costs, can be altered once every three years.
* Interest rates under the external benchmark must be reset at least once every three months.
Transition from Existing Benchmarks:
* Existing loans and credit limits linked to MCLR/Base Rate/BPLR continue until repayment or renewal.
* Borrowers eligible for prepayment of floating rate loans without prepayment charges can switch to an external benchmark without charges (except administrative/legal costs). The rate post-switch should be the same as for a new loan of the same category, type, tenor, and amount.
* Other existing borrowers can move to an external benchmark on mutually acceptable terms.
* Switchover should not be treated as foreclosure.
Amendments to Master Direction:
* Paragraph 7 is replaced to reflect the new external benchmark requirement.
* Paragraph 8e is added, detailing spread under the external benchmark.
* Paragraph 9ii is added, specifying interest rate reset under the external benchmark.
* Paragraph 11ii is added, outlining the transition to an external benchmark from MCLR/Base Rate/BPLR.
* Paragraph 5: Definition of "External benchmark rate" is updated.
* Paragraph 4a: Updated to reflect external benchmark pricing for floating rate loans.
* Paragraph 4axi: Lending below the benchmark rate is prohibited for loans linked to that benchmark.
* Paragraph 6ai: Floating rate loans sanctioned/renewed between July 1, 2010, and March 31, 2016, should be priced with reference to the Base Rate.
* Paragraph 6bi: Floating rate loans sanctioned/renewed from April 1, 2016, should be priced with reference to MCLR.
* Paragraph 9 id: Reset periodicity under MCLR should correspond to the tenor/maturity of the MCLR.
* Paragraph 13: Deletion of references to Base rate/MCLR linking exemptions.
Impact Analysis:
Scheduled Commercial Banks (excluding RRBs), Small Finance Banks, and Local Area Banks:
* Impact: Must comply with the new external benchmark lending requirements for new floating rate loans to personal/retail borrowers and Micro and Small Enterprises.
* Action Required: Update lending policies, systems, and loan agreements to reflect the new external benchmark requirements by October 1, 2019.
Borrowers (Personal/Retail and Micro & Small Enterprises):
* Impact: New floating rate loans will be linked to external benchmarks, potentially affecting interest rate transmission and transparency.
* Action Required: Understand the implications of external benchmark-linked loans and evaluate the options for switching existing loans.
Financial Benchmarks India Private Ltd (FBIL):
* Impact: Continued role in publishing benchmark rates for use by banks.
* Action Required: Ensure timely and accurate publication of relevant benchmark rates.
Key Entities Referenced
Reserve Bank of India: Central bank of India, responsible for monetary policy and regulation of the banking system. The policy document outlines its directives regarding external benchmark-based lending.
Scheduled Commercial Banks: Banks in India that are listed in the Second Schedule to the Reserve Bank of India Act, 1934, excluding Regional Rural Banks (RRBs).
Small Finance Banks: A type of bank in India licensed by the Reserve Bank of India to further financial inclusion by primarily undertaking basic banking activities to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, and unorganized sector entities.
Local Area Banks: A type of bank in India licensed to operate in a specific local area, aimed at mobilizing rural savings and providing credit to local businesses and agriculture.
Marginal Cost of Funds based Lending Rate (MCLR): An internal benchmark lending rate used by banks in India, which has been assessed as not effectively transmitting monetary policy.
Base Rate: An older internal benchmark lending rate used by banks in India, also assessed as not effectively transmitting monetary policy.
Financial Benchmarks India Private Ltd (FBIL): An organization authorized to publish benchmark market interest rates, including Government of India Treasury Bill yields.
Internal Study Group (ISG): A group constituted by the Reserve Bank of India to examine aspects of the MCLR system and recommend improvements.
RBI/2019-20/53
DBR.DIR.BC.No.14/13.03.00/2019-20 September 04, 2019
All Scheduled Commercial Banks (excluding RRBs)
All Small Finance Banks
All Local Area Banks
Madam / Dear Sir,
External Benchmark Based Lending
As you are aware, Reserve Bank had constituted an Internal Study Group (ISG) to
examine various aspects of the marginal cost of funds-based lending rate (MCLR)
system. The final report of the ISG was published in October 2017 for public
feedback. The ISG observed that internal benchmarks such as the Base rate/MCLR
have not delivered effective transmission of monetary policy. The Study Group had,
therefore, recommended a switchover to an external benchmark in a time-bound
manner.
2. As a step in that direction, it was announced in the fifth bi-monthly Monetary Policy
Statement for 2018-19 under ‘Statement on Developmental and Regulatory Policies’
dated December 05, 2018, that all new floating rate personal or retail loans and
floating rate loans to Micro and Small Enterprises extended by banks from April 1,
2019 shall be linked to external benchmarks. Subsequently, it was announced in the
first bi-monthly Monetary Policy Statement for 2019-20 under ‘Statement on
Developmental and Regulatory Policies’ dated April 04, 2019 to hold further
consultations with stakeholders and work out an effective mechanism for
transmission of rates. Based on the consultations with stakeholders, it has now been
decided to link all new floating rate personal or retail loans (housing, auto, etc.) and
floating rate loans to Micro and Small Enterprises extended by banks with effect from
October 01, 2019 to external benchmarks.
3. Accordingly, RBI instructions contained in Master Direction on Interest Rate on
Advances issued vide DBR.Dir.No.85/13.03.00/2015-16 dated March 03, 2016 are
amended as under:
3.1 The existing paragraph No. 7 of the aforesaid Master Direction stands replaced
as under:(a) All new floating rate personal or retail loans (housing, auto, etc.) and floating rate
loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall
be benchmarked to one of the following:
- Reserve Bank of India policy repo rate
- Government of India 3-Months Treasury Bill yield published by the Financial
Benchmarks India Private Ltd (FBIL)
- Government of India 6-Months Treasury Bill yield published by the FBIL
- Any other benchmark market interest rate published by the FBIL.
(b) Banks are free to offer such external benchmark linked loans to other types of
borrowers as well.
(c) In order to ensure transparency, standardisation, and ease of understanding of
loan products by borrowers, a bank must adopt a uniform external benchmark within
a loan category; in other words, the adoption of multiple benchmarks by the same
bank is not allowed within a loan category.
3.2 A new paragraph No.8(e) is added to the aforesaid Master Direction as given
below:
Spread under External Benchmark
Banks are free to decide the spread over the external benchmark. However, credit
risk premium may undergo change only when borrower’s credit assessment
undergoes a substantial change, as agreed upon in the loan contract. Further, other
components of spread including operating cost could be altered once in three years.
3.3 A new paragraph No. 9(ii) is added to the aforesaid Master Direction as given
below:
Reset of Interest Rates under External Benchmark
The interest rate under external benchmark shall be reset at least once in three
months.
3.4 A new paragraph No. 11(ii) is added to the aforesaid Master Direction as given
below:
Transition to External Benchmark from MCLR/Base Rate/BPLR
Existing loans and credit limits linked to the MCLR/Base Rate/BPLR shall continue
till repayment or renewal, as the case may be.
Provided that floating rate term loans sanctioned to borrowers who, in terms of
extant guidelines, are eligible to prepay a floating rate loan without pre-payment
charges, shall be eligible for switchover to External Benchmark without any
charges/fees, except reasonable administrative/ legal costs. The final rate charged to
this category of borrowers, post switchover to external benchmark, shall be same asthe rate charged for a new loan of the same category, type, tenor and amount, at the
time of origination of the loan.
Provided that other existing borrowers shall have the option to move to External
Benchmark at mutually acceptable terms.
Provided that the switch-over shall not be treated as a foreclosure of existing facility.
4. The existing paragraph No. 2 of the aforesaid Master Direction is applicable for
Small Finance Banks and Local Area Banks and the para is amended accordingly.
5. The existing paragraph No. 3(a)(iv) of the aforesaid Master Direction stands
amended as under:
External benchmark rate means the reference rate which includes:
(a) Reserve Bank of India policy Repo Rate
(b) Government of India 3-Months and 6-Months Treasury Bill yields published by
Financial Benchmarks India Private Ltd (FBIL)
(c) Any other benchmark market interest rate published by FBIL.
6. Some of the sub-paragraphs of para 4(a) of the aforesaid Master Direction stands
amended as given hereunder:
(ii) All floating rate loans, except those mentioned in Section 13, shall be priced with
reference to the benchmark indicated in chapter III.
(iv) When the floating rate advances are linked to an internal benchmark rate, banks
shall determine their actual lending rates by adding the components of spread to the
internal benchmark rate.
(vi) Interest rates on fixed rate loans of tenor below 3 years shall not be less than the
benchmark rate for similar tenor and shall be as per directions contained in Section
13(d)(v).
7. A new paragraph No. 4(a)(xi) is added to the aforesaid Master Direction as
indicated below:
There shall be no lending below the benchmark rate for a particular maturity for all
loans linked to that benchmark.
8. The existing paragraph No. 6(a)(i) of the aforesaid Master Direction stands
amended as under:
All floating rate rupee loans sanctioned and renewed between July 1, 2010 and
March 31, 2016 shall be priced with reference to the Base Rate which will be the
internal benchmark for such purposes.
9. The existing paragraph No. 6(b)(i) of the aforesaid Master Direction stands
amended as under:
All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 shall be
priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR)which will be the internal benchmark for such purposes subject to the provisions
contained in paragraph 7 of this Master Direction.
10. A new paragraph No. 9 (i)(d) is added to the aforesaid Master Direction as
indicated below:
The periodicity of the reset under MCLR shall correspond to the tenor/maturity of the
MCLR to which the loan is linked.
11. The following part of the sub-paragraphs (a), (b), (c) of para 13 of the aforesaid
Master Direction as indicated hereunder stands deleted:
“shall be exempted from being linked to Base rate/MCLR as the benchmark for
determining interest rate’’
12. The following part of the paragraph 13(d) of the aforesaid Master Direction as
indicated hereunder stands deleted:
“shall be priced without being linked to Base rate/MCLR as the benchmark for
determining interest rate’’
Yours faithfully,
(Dr. S. K. Kar)
Chief General Manager