Shaktikanta Das, governor Reserve Bank of India (RBI) said in his word, new loans to an external benchmark like the central bank’s repo rate will be formalised as an economic impetus is required not just from monetary policy assistance but also through the transmission of rates. However, he did not clarify if formalisation would mean that RBI will issue guidelines on this.
As per the central bank, banks must set their interest rates for new loans against an external benchmark beginning of 1st April. The new rule was supposed to apply to all new retail loans and small business loans with floating rates. Meanwhile, in April, Das postponed the move and said RBI will hold consultations with stakeholders on it.
Currently, banks price their loans against their marginal cost of fund-based lending rate(MCLR).
The way banks set interest rates is critical for the smooth transmission of policy rates. For transparent process RBI had adopted this process, to directed the banks to price their loans against their benchmark prime lending rate (BPLR), base rate, and, finally, MCLR. In last year, banks have been asked to price their loans against an external benchmark.