Come April 1 2019, banks will link their floating interest rates to external benchmarks, with the RBI proposing this new system. The interest rates are currently linked to internal benchmarks.
The move is expected to improve transparency in the system, with the new guidelines applying to new small business loans and retails loans which have floating interest rates. The new interest rate guidelines will not be applicable to existing loans.
The current benchmark being used is the Marginal cost of funds-based lending rate (MCLR), with certain rates linked to internal benchmarks like the base rate, the prime lending rate, or the benchmark prime lending rate.
According to a report by Livemint, banks can choose the external benchmark they wish to link their interest rates to. The external benchmark can be either the 91-day Treasury bill yield, the policy repo rate, the 182-day Treasury bill yield, the Mibor, or any benchmark market interest rate produced by Financial Benchmarks India Private Limited (FBIL).
According to the RBI, a uniform external benchmark should be applied within a particular loan category.
The final guidelines for the same will be released towards the end of this year.
Sources: Livemint, The Times of India, Economic Times