RAS question
Which external benchmark is most commonly used by banks for retail lending?
Correct answer: (A) Repo rate.
The RBI repo rate is the external benchmark most commonly used by banks for floating-rate retail lending.
Explanation
Most banks use the RBI repo rate as the external benchmark for retail lending, including home loans, auto loans and MSME loans. Moneycontrol notes that since 1 October 2019, banks have linked floating-rate retail loans to an external benchmark, and that the benchmark is the repo rate in most cases. This link matters because changes in the repo rate directly influence interest rates on such loans. SBI uses its own Repo Linked Lending Rate. The broader policy purpose is better monetary policy transmission: when the RBI changes the repo rate, retail loan rates can adjust more directly instead of moving slowly through older internal benchmarks.
Why the other options are wrong
- (B) The T-bill rate is an external benchmark, but the repo rate is the benchmark used in most retail lending cases.
- (C) LIBOR is an international benchmark and is being phased out, so it is not the benchmark used for Indian floating-rate retail loans.
- (D) MIBOR is used in financial markets, but the most common retail-lending benchmark is the RBI repo rate.
Concept
External benchmark lending rates are a key channel of monetary policy transmission. The concept recurs in RAS because repo-rate changes, retail credit and bank lending rates are central to applied Indian Economy questions.