New Delhi, Sep 5 (KNN) With a view to improve transmission of interest rates, the Reserve Bank of India (RBI) has asked banks to link all new floating rate loans for retail, personal and micro, small and medium enterprises (MSME) to an external benchmark from October 1, 2019.

In a statement, Central Bank said that the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory.

The RBI, therefore, has made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark effective October 1, 2019, it added.

According to RBI, banks are free to choose one of the several benchmarks. However, a lender cannot adopt multiple benchmarks within a loan category.

Banks are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract, RBI said.