RBI announces MSME expert committee and new external benchmark floating rate loans

The Reserve Bank of India (RBI) has decided to form an expert committee on Micro Small and Medium Enterprises (MSMEs) to propose long-term solutions for the economic and financial sustainability of these businesses, according to media reports. The committee’s composition related terms of reference will be finalised by the end of December 2018 and the report will be ready by the end of June 2019, the bank added.

Additionally, it proposed a new external benchmarking of floating rate loans by banks to MSMEs. Under this, all new floating rate personal or retail loans and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 will be benchmarked under the following: the RBI policy repo rate, Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), Government of India 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.

The spread over the benchmark rate, in this system, will be decided at the banks’ discretion and at the inception of the loan. It should also remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change, and as agreed upon in the loan contract, the RBI added. Banks are thus free to offer external benchmark-linked loans to other types of borrowers as well.

Further, banks must adopt uniform external benchmark within a loan category in order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers. The final guidelines are set to be issued by the end of December 2018, the RBI said.

The announcement follows an October internal study group report, which reviewed the working of the Marginal Cost of Funds based Lending Rate (MCLR) System and recommended the use of external benchmarks by banks for their floating rate loans. This was proposed instead of the system of internal benchmarks such as Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR).