Explained: External Benchmarking

The Reserve Bank of India (RBI) has proposed a major change in the way banks price their loans. Banks will now have to link the interest rates charged by them on different categories of loans to the external benchmarks instead of the used internal benchmarks, which is the norm now.
Under the new system which will come into effect from April 1, 2019, banks will have to link their lending rates with an external benchmark instead of MCLR. The RBI has given these options to banks: RBI repo rate, the 91-day T-bill yield; the 182-day T-bill yield; or any other benchmark market interest rate produced by the Financial Benchmarks India Pvt. Ltd.
One of these benchmarks will be used to decide the lending rate in addition to the spread, Banks will be free to decide their spread value but it will have to be fixed for the tenure of the loan. However, it can change if the credit score of the borrower changes. The interest rates under the new system will change every month.

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