The Reserve Bank of India has asked banks to direct all new lending to housing, vehicles and micro, small and medium enterprises (MSMEs) at floating rate from October 1 on external standards like repo rate. Banks have been asked to link the interest rate of these loans with external standards like repo rate from October 1. With this, the benefit of the reduction in policy interest rates is expected to reach the borrowing consumers relatively fast.

Industry and retail borrowers have been complaining that despite the reduction in the repo rate by the Reserve Bank, banks are not giving full benefits to the consumers. In a statement on Wednesday, the Reserve Bank said that it has been observed that the benefit of changing the policy rates of the Reserve Bank in the existing Marginal Cost Based Lending Rate (MCLR) regime of banks has not been satisfactory.

In view of this, the Reserve Bank has issued a circular on Wednesday to make it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs from the external standard from October 1, 2019. This year the Reserve Bank has cut the repo rate by 1.10 percent. But only 0.40 percent of this benefit has been given to consumers by banks.

The external parameters that banks will have to add to their loan interest rates include repo, return on three or six months treasury bill or Financial Benchmarks India Private Limited. (FBIL) can be any other standard published by. The central bank has said that it would be necessary to revise the external standard based interest rate at least once in three months.

State Bank of India is the first bank to repo some of its loans. Later many more banks have also linked their loans to repo or any other external standard.In August 2017, the Reserve Bank formed the Internal Study Group (ISG) to review the MCLR system. ISG recommended linking of loans to external standards.