MCLR linked to External Benchmark Based Lending

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. In the fifth bi-monthly Monetary Policy
Statement for 2018-19 under ‘Statement on Developmental and Regulatory Policies’
dated December 05, 2018, announced 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.
(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.
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.
Reset of Interest Rates under External Benchmark
The interest rate under external benchmark shall be reset at least once in three months.
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 as the rate charged for a new loan of the same category, type, tenor and amount, at thetime 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.
For Small Finance Banks and Local Area BanksExternal 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. 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. Interest rates on fixed rate loans of tenor below 3 years shall not be less than the benchmark rate for similar tenor There shall be no lending below the benchmark
rate for a particular maturity for all loans linked to that benchmark.
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.
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 The periodicity of the reset under MCLR shall correspond to the tenor/maturity of the MCLR to which the loan is linked.

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