RBI directs banks to link all the new floating rate loans to medium enterprises with an external benchmark

The Reserve Bank has directed banks to link all new floating-rate loan to medium enterprises with an external benchmark. In a circular, RBI said that the direction will be effective from April 1, 2020. With respect to micro and small enterprises, floating-rate loans are already linked with external benchmarks.

The move is aimed at further strengthening monetary policy transmission so that benefits of reduction in key lending rate can be passed on to medium enterprises. According to RBI, the monetary policy transmission has improved in respect of the sectors where new floating rate loans have been linked to external benchmarks.

This circular of February 26, 2020, is an extension of the Reserve Bank's previous circular published on September 4, 2019, in which the central bank made it mandatory for banks to link all new floating personal and retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises (MSMEs) to external interest rate benchmarks as a big push to make transmission of monetary policy more effective. This circular became effective from October 01, 2019.

According to the RBI, after the introduction of an external benchmark system, the monetary policy transmission has improved in respect of the sectors where new floating rate loans have been linked to the external benchmarks.

To further strengthen monetary policy transmission, it has now been decided that all new floating rate loans to the Medium Enterprises extended by banks from April 01, 2020, shall be linked to the external benchmarks as indicated in the aforesaid circular. All the other instructions as contained in the aforesaid circular remain unchanged.