External Benchmark Based Lending

This is the circular that decides how a floating-rate LAP is priced. RBI's study group found that internal benchmarks like Base Rate and MCLR were not passing on policy-rate cuts to borrowers quickly. So from 1 October 2019, all new floating-rate personal/retail loans — housing, auto and the broader retail basket — and floating-rate loans to Micro & Small Enterprises must be linked to an external benchmark.

The permitted benchmarks are the RBI policy repo rate, the 3-month or 6-month Government of India Treasury Bill yield published by FBIL, or any other FBIL-published market rate. A bank must use one uniform external benchmark within a loan category — it cannot mix multiple benchmarks for the same product. Banks are free to lend external-benchmark loans to other borrower types too.

On spread: banks decide the spread over the benchmark freely, but the credit-risk premium may change only when the borrower's credit assessment changes substantially, as agreed in the contract; other spread components like operating cost can change only once in three years. The interest rate must be reset at least once every three months — so benchmark moves reach the borrower quickly, in both directions.

For transition, existing MCLR/Base Rate/BPLR loans continue until repayment or renewal. Importantly, borrowers eligible to prepay a floating-rate loan without pre-payment charges can switch to an external benchmark without charges (bar reasonable administrative/legal costs), and the switch is not treated as a foreclosure. For a LAP book, this governs benchmark selection, the quarterly reset cadence, spread-change discipline, and how you handle switch requests — and it interlocks directly with the floating-rate reset and pre-payment circulars.