# Why is my MSME loan rate linked to the repo rate, and when should it fall after an RBI rate cut?

Canonical: https://senseible.earth/answers/msme-loan-rate-linked-to-repo-rate

RBI requires banks to link new floating rate loans to micro and small enterprises to an external benchmark, most often the repo rate, so rate changes pass through. After a cut, your rate falls on your loan's next reset date, which must come at least once every three months.

## Where the rule comes from

RBI's circular of 4 September 2019 made banks link all new floating rate loans to micro and small enterprises, from 1 October 2019, to an external benchmark: the RBI repo rate, a government Treasury bill yield published by FBIL, or another FBIL benchmark. Floating rate loans to medium enterprises followed from 1 April 2020. Each bank picks the benchmark, but must use one benchmark within a loan category.

## How your rate is built

- Your rate = benchmark + spread. With a repo-linked loan, the benchmark moves only when RBI changes the repo rate.
- Reset: the rate must be reset at least once every three months. Your sanction letter states the reset dates.
- Credit risk premium: can change only if your credit assessment changes substantially, as agreed in the loan contract.
- Other parts of the spread: can be raised only once in three years. Since 1 October 2025 a bank may cut them sooner in the borrower's favour, under its board-approved policy.

## When a cut reaches you

On the first reset date after the repo cut. If your loan resets quarterly and the cut came just after a reset, you may wait close to three months. The bank may keep your EMI and shorten the tenure, or cut the EMI; ask which, and ask for the revised repayment schedule in writing. Some banks also offer a switch to a fixed rate at reset, at their discretion.

## Loans that do not follow the repo rate

- Older loans on MCLR or base rate reset on their own schedule, often yearly, and pass on cuts more slowly. You can ask to switch to the external benchmark; the bank may charge a fee and the new spread is agreed between you.
- Fixed rate loans do not change.
- Loans from NBFCs: the external benchmark rule was issued to banks, so an NBFC loan moves as its agreement says. Read the reset clause before you sign.

## Worked example: a 25 basis point cut (rates assumed)

- Outstanding term loan: ₹50,00,000; repo 5.50% + spread 3.50% = 9.00%
- RBI cuts repo by 0.25%: new rate 5.25% + 3.50% = 8.75% from the next reset
- Interest saved in a year on the same balance: 50,00,000 x 0.25% = ₹12,500

Repo and spread are illustrative, not the current rates. Your saving depends on the balance outstanding and the reset date.

## What Senseible does here

Your loan rate is set by your bank under RBI rules. If the loan is a green loan with sustainability reporting, Senseible keeps the bill-backed emission records the lender may ask for after disbursement.

- [Sustainability-linked loan interest discount](https://senseible.earth/answers/sustainability-linked-loan-interest-discount)
- [Energy efficiency loan: EMI vs savings](https://senseible.earth/answers/energy-efficiency-loan-emi-vs-savings)
- [Green loan vs traditional loan cost](https://senseible.earth/climate-intelligence/green-loan-vs-traditional-loan-real-cost-comparison)

Sources: [RBI circular, External benchmark based lending, 4 September 2019 (micro and small enterprises from 1 October 2019), and circular of 26 February 2020 (medium enterprises from 1 April 2020)](https://www.rbi.org.in), [RBI amendment on interest rate on advances effective 1 October 2025 (earlier spread reduction, fixed rate switch at reset), now in RBI's consolidated Directions on interest rates on advances, 28 November 2025](https://www.rbi.org.in)

Last reviewed 2026-10-19. RBI consolidated its interest rate rules for banks in Directions of 28 November 2025; recheck the three-month reset and spread rules there before relying on them (checked 19 October 2026).