Small and medium businesses will now get loans on new standards. By this, they too can get the benefit of cutting the repo rate. In fact, all new loans to medium enterprises (MSME) at variable interest rates (Floating Rates) will be linked to external standards such as repos from 1 April. In the context of micro and small enterprises, loans given at variable rates are already linked to external standards.
Let me tell you, the Reserve Bank on September 4 last year asked all commercial banks to add all new personal and retail loans with floating rate and floating rate loan to MSME from any external benchmark rate from October 1. Many banks in the country have started giving retail loans linked to repo rates since September.
The rules will come into effect from 1 April 2020
The Reserve Bank issued a circular stating that now the loans given to medium enterprises at floating rates from April 1, 2020 will be linked to external benchmarks. According to the central bank, the objective of this initiative is to strengthen the system of giving monetary policy benefits to customers, so that the benefit of reduction in policy rate (repo) can also be given to medium enterprises.
Retail loan already linked to external benchmark
Personal and retail loans at floating rate have already been linked to the external benchmark. Repo rate, return on treasury bill and other market interest rate published by FBIL (Financial Benchmark India Private Limited) are external benchmarks.
According to the RBI, after introducing external benchmark system, the system of giving benefit of changes in monetary policy to customers has improved. Since February 2019, RBI has cut the repo rate or short term lending rate by 1.35 percent.