RBI proposes new method to benchmark floating rate of loans for MSMEs

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The 5 composition of the Committee and its Terms of Reference will be finalised by the end of December 2018 and the report will be submitted by the end of June 2019.
Setting out various developmental and regulatory policy measures for strengthening regulation and supervision; the Reserve Bank of India on Wednesday said there will be a new external benchmarking of Floating Rate loans by Banks to Micro, Small and Medium Enterprises (MSME) and constituting a new committee to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector.

The Report of the Internal Study Group to Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System chaired by Dr. Janak Raj released in October for public feedback, had recommended the use of external benchmarks by banks for their floating rate loans instead of the present system of internal benchmarks [Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate and Marginal Cost of Funds based Lending Rate (MCLR)].
“As a step in that direction, it is proposed that all new floating rate for personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 shall be benchmarked to one of the following,” said the RBI.
  • Reserve Bank of India policy repo rate, or
  • Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
  • 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 — to be decided wholly at banks’ discretion at the inception of the loan — should 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 final guidelines will be issued by the end of December.

The Central bank said an expert committee on Micro, Small and Medium Enterprises will also be constituted. “Micro, Small and Medium Enterprises (MSMEs) contribute significantly to employment, entrepreneurship and growth in the economy. They remain, by their predominantly informal nature, vulnerable to structural and cyclical shocks, at times with persistent effects. It is important to understand the economic forces and transactions costs affecting the performance of the MSMEs, while often the rehabilitation approach to the MSMEs stress has focused on deploying favourable credit terms and regulatory forbearances,” said RBI in a release.

To this end, an Expert Committee will be constituted by the RBI to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector. The 5 composition of the Committee and its Terms of Reference will be finalised by the end of December 2018 and the report will be submitted by the end of June 2019.
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