The country's largest lender, State Bank of India (SBI) has decided to link all its floating rate loans to the repo rate from next month.
"SBI has decided to adopt Repo Rate as the external benchmark for all floating rate loans for MSME, housing and retail loans effective October 1, 2019, as per RBI’s notification dated September 4, 2019," the bank said in the statement.
SBI voluntarily extends the external benchmark based lending to Medium Enterprises also, to boost lending to the MSME sector as a whole, it added.
SBI had introduced floating rate home loans effective July 1, 2019. However, last week, the bank had withdrawn the repo-linked loans. According to the sources in the bank, it was done with the aim of complying with the RBI norms.
In a downward interest scenario, the move is expected to make loans cheaper. The Reserve Bank, till now, has slashed the key policy rates by 110 basis points in the current financial year, in a bid to provide booster to slowing growth.
Earlier this month, RBI had made it mandatory for the banks to link at least one of their product to the external benchmark.
The rule, which will be implemented from October 1 will make it mandatory to link such loans to either policy repo rate, the government of India three-Months or six-month treasury bill yield published by the Financial Benchmarks India Private Ltd (FBIL) or any other benchmark market interest rate published by the FBIL. External benchmark rate means the reference rate which includes any of the four metrics.
However, the banks are free to decide the spread over the benchmarks, according to the RBI circular issued on Wednesday.