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New base rate math: RBI moves toward marginal cost of funds

The final norms on marginal costs for banks will be effective from April 1, 2016.

The Reserve Bank on Thursday announced a new base rate formula — moving toward marginal cost of funds methodology for interest rate on advances. The final norms on marginal costs for banks will be effective from April 1, 2016. RBI says all ‘loans and credit limits from April 1 will be priced with reference to Marginal Cost of Funds based Lending Rate (MCLR).

Apart from helping improve the transmission of policy rates into lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances, according to the RBI press release. 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, RBI says.

Below are the key highlights:

1) 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.

2) The MCLR will be a tenor linked internal benchmark.

3) Actual lending rates will be determined by adding the components of spread to the MCLR.

4) Banks will review and publish their MCLR of different maturities every month on a pre-announced date.

5) 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.

6) The periodicity of reset shall be one year or lower.

7) 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.

8) Existing loans and credit limits linked to the base rate may continue till repayment or renewal, as the case may be. Existing borrowers will also have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.

9) Banks will continue to review and publish base rate as hitherto.

The Reserve Bank of India had brought out the draft guidelines on banks adopting marginal cost of funds methodology for calculating base rates on September 1, 2015.

More to follow…

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