RBI announces new rules to calculate base rate
Other | Photo Credit: Reuters

To ensure better transmission of its rate cuts to borrowers, RBI on Thursday said all banks will have to follow a new and uniform methodology from April next year to calculate base rate as per the marginal cost of funds.

Apart from helping borrowers reap the benefit of lower rates, the step will also improve transparency in the methodology followed by banks for determining interest rates on advances.

The Reserve Bank said: "The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.

"Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long run value and contribution to economic growth." 

As per the final guidelines: "All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes".

Many banks currently follow average cost of funds or 'blended cost of funds (liabilities) method' for calculating the base rate, while a few already take into account the proposed measure of 'marginal cost of funds'.

RBI said the MCLR will be a tenor linked internal benchmark and actual lending rates will be determined by adding the components of spread to the MCLR.

"Banks will review and publish their MCLR of different maturities every month on a pre-announced date," the RBI said.

Banks may specify interest reset dates on their floating rate loans.

They will have the option to offer loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of review of MCLR. The periodicity of reset shall be one year or lower.

"The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period," the RBI said.

Existing loans and credit limits linked to the Base Rate "may continue till repayment or renewal", the RBI said, adding that the existing borrowers will also have the option to move to the MCLR linked loan at mutually acceptable terms.

It further said that banks will continue to review and publish Base Rate as hitherto.

Leave Your Comment(s)