The Reserve Bank of India directive asking banks to link base rate to marginal cost of funds-based lending rate with effect from April 1, 2018 is likely to hurt home loan borrowers. Though, the central bank aimed to benefit customers from the interest rate movements set by the regulator.
As per market experts, the move comes at a time when interest rates are set to increase after four years easing cycle.
Base rate is the benchmark that banks charged home loan borrowers who took loan before April 2016 while MCLR is the new benchmark based on cost of funds which is now mandated to be used for charging borrowers. It is to be noted that base rate is determined by average cost of funds whereas MCLR is based on the current cost of fund.
Even after the introduction of MCLR in April 2016, a major chunk of bank loans remained linked to the base rate and hence the central bank expressed concern over weak rate transmission. The MCLR is closely tied to the actual deposit rates and is perhaps more sensitive when it comes to transmission of monetary policy rates.
Due to the gush of liquidity, last year most banks reduced MCLR rate sharply while the base rate remained unchanged.
Deputy governor of the RBI said last month "We are concerned about the inadequacy of monetary transmission to base rate".
"Harmonising the calculation of base rate with MCLR so that responsiveness of the credit portfolio to monetary policy signal is not hindered by large part of bank's portfolio linked to base rate."
But with interest rates already rising more than 20 basis points from their trough, the linking of base rate to MCLR would raise the monthly payments for borrowers.
On Tuesday, SBI raised both base rate and benchmark prime lending rate by 5 basis points. One basis point is one-hundredth of a percentage point.