External Benchmarking of Loans

External Benchmarking of Loans

BE/RBI NOTE/11/2019


With a view to bring improvement in monetary transmission, an internal study group of RBI recommended that all new floating rates either personal or retails (like Housing, Auto etc.,) and also loans extended to Micro and Small Enterprises released by banks w.e.f 1st April 2019 shall compulsorily be bench marked to one of the four external benchmarks viz

  1. RBI’s Policy Repo Rate
  2. 91 day Treasury Bill (T-Bill) Yield
  3. 182-day T-Bill Yield and
  4. Any other benchmark market interest rate produced by the Financial Benchmarks India Pvt. Ltd.,


  • A survey by FICCI-IBA of Bankers reveals that spreads kept by banks under the proposed external benchmarking of new floating rate loans could be higher in order to guard themselves sufficiently in case of volatility to a greater extent in the benchmark.
  • An increased spread over the external benchmark possible could raise the overall interest rate of retail loans.
  • Also, the survey adds that using external benchmarks could be risky, due to lack of depth in T-Bill and CD (Certificate of Deposit).
  • Also, markets could use such rates for manipulation purpose.
  • Sometimes, T-Bill would echo out fiscal risks, which in turn would get spread to the credit market when it is used as a benchmark.
  • Further, it was observed by the survey that Repo rate does not possess term structure and banks do not have appreciable accessibility to the funds at Repo Rate.

Floating Rate Deposits:

  • Bankers are of the opinion that in order to reduce liquidity mismatches and to mitigate volatility in earnings, the introduction of floating rate deposits would possibly be a solution.
  • However, such floating rate deposits are in the budding stage as of now.
  • The Survey also added that bankers who have offered floating rates on deposits have not had any encouraging experience.
  • It is felt that customers encourage a stable return on their deposits and floating rate deposit product was not popular as was expected.

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