Understanding RBI's New Base Rate Calculation For Banks On Advances Or Loans?

In order to improve transparency in the methodology followed by banks for determining interest rates on advances, the Reserve Bank of India (RBI) has come up with guidelines on computing interest rates on advances based on the marginal cost of funds.

The new calculation method will come into effect from April 1, 2016.

The new uniform rules are expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.

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

Highlights of the guidelines are as under:

• 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).
• The MCLR will be a tenor linked internal benchmark.
• 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.
• 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.
• Banks will continue to review and publish Base Rate as hitherto.

What should existing borrower do?

Existing borrower with loans and credit limits linked to the Base Rate may continue till repayment or renewal, which ever is applicable.

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.

Source:RBI
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