New Delhi, Dec 5 (KNN) To identify causes and propose long-term solutions for the economic and financial sustainability of the Micro Small and Medium Enterprises (MSMEs), the Reserve Bank of India decided to form an expert committee on MSMEs.

The composition of the Committee and its Terms of Reference will be finalized by the end of December 2018 and the report will be submitted by the end of June 2019, said RBI in a release.

Releasing the statement on developmental and regulatory policies, RBI proposed a new external benchmarking of floating rate loans by banks to MSMEs.

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 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:

  ----   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.

RBI said that the spread over the benchmark rate to be decided wholly at banks’ discretion at the inception of the loan and  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.

Banks are free to offer such external benchmark linked loans to other types of borrowers as well, said RBI in a release.

In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt a uniform external benchmark within a loan category, it added.

Explaining it in easier words, RBI said “The adoption of multiple benchmarks by the same bank is not allowed within a loan category.”

The final guidelines will be issued by the end of December 2018, it added.