The Reserve Bank of India has ordered banks to link all their new floating rate loans to medium enterprises with an external benchmark. The apex bank’s circular in this regard stated that the direction will be effective from April 1, 2020.
The new floating rate loans to small and micro enterprises are already linked with external benchmarks. The move is aimed at strengthening monetary policy transmission so that even the medium enterprises can get the benefits of reduction in key lending rates.
According to RBI, the monetary policy transmission has improved in sectors where new floating rate loans have been linked to external benchmarks.
RBI’s Direction: Key Highlights
-> As per an RBI circular issued on February 26, 2020, all new floating rate loans extended by the banks to medium enterprises should be linked to external benchmarks from April 1, 2020.
-> The floating rate loans to micro and small enterprises as well as the floating rate personal and retail loans have already been linked to external benchmarks.
-> The external benchmarks include RBI repo rate, Treasury bill yields and other market interest rate published by the Financial Benchmark India Private Ltd (FBIL).
-> As per RBI, after the introduction of an external benchmark system, the monetary policy transmission has improved in sectors where new floating rate loans have been linked with external benchmarks.
-> The RBI had reduced repo rate also called as the short term lending rate by 135 basis points since February 2019.
What is a floating rate loan?
A floating-rate loan refers to a loan with a floating interest rate. A floating interest rate is known as an adjustable or variable rate. It refers to any debt instrument such as loan, mortgage, credit or bond that does not have a fixed rate of interest.