As Reserve Bank of India (RBI) asks banks to link base rate to Marginal Cost of Funds based Lending Rates (MCLR) from 1st of April 2016, loans prior to that will be cheaper.

MCLR is the minimum interest rate set for a bank below which it cannot lend, except in some cases allowed by the RBI.

Home loans before 1st April were given on base rates that were arbitrarily set by banks. Interest-bearing MCLR have been lowering post demonitisation. "With the introduction of the MCLR system, it was expected that the existing Base Rate linked credit exposures shall also migrate to MCLR system," RBI said in the statement on Developmental and Regulatory Policies.

RBI Deputy Governor NS Vishwanathan said told reporters after MPC meet that the RBI has been concerned about the inadequacy of monetary transmission to the base rate and about a large number of accounts still being under the base rate regime.

"We are now harmonising the calculation of base rate with the MCLR so that the responsiveness of the credit portfolio to monetary policy signals is not hindered by interest rate on large part of bank portfolio being linked to base rate," he said.

The RBI has on several occasions flayed lenders for keeping interest rates high and flagged concerns over base rate and MCLR, saying these have not improved monetary transmission.

Inputs From PTI