RBI directs banks to link retail and MSME loans to external benchmark

With an aim of improving transmission of interest rates, the RBI has recently directed the banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises borrowers to an external benchmark with effect from October 1.
The RBI also stated that the banks can link loans to other segments of borrowers.

State Bank of India, Union Bank of India, Central Bank of India, Punjab National Bank and Federal Bank have already started linking their lending rates to an external benchmark. Other banks mostly price loans under the marginal cost of funds-based lending rate (MCLR).

In a statement, the central bank stated that transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory.