The Reserve Bank of India (RBI) issued fresh norms on how banks ought to calculate their lending rates — a move which is aimed at lowering borrowing costs at a time when lenders are reluctant to do so.
The new method — Marginal Cost of funds based Lending Rate (MCLR) — will replace the present base rate system.
MCLR, as the name suggests, mandates banks to calculate the lending rate taking into account the marginal cost of funds. In the base rate system, it was left to the individual banks as to what cost it used, which typically was the average cost of funds.
RBI has mandated that MCLR will be a tenor-linked benchmark, and banks should arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of marginal cost of funds, cost of maintaining cash reserve ratio and operating costs.
This new framework will come into effect from April 1, 2016. Like base rate, banks are not allowed to lend below MCLR, except for few categories like loans against deposits, loans to bank’s own employees.
In addition, fixed rate loans, which are typically personal loans and auto loans, will not be linked to MCLR.
RBI has also clarified that loans that charge fixed interest rate in initial years and floating rate in the later years should be priced according to the MCLR norms.
Fact Punch
Banks have been mandated to calculate MCLR for different maturities like 1 day, 1 month, three month, six month, and one year. Banks are free to include more maturities for MCLR.
To arrive at the actual lending rate, banks will add a spread to the lending rate. The central bank has also prescribed how a bank should decide its spread and said banks have to determine the range of spread for a given category of borrower or type of loan. The policy regarding the spread should be approved by the bank’s board.
The guidelines were also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
Banks have to review and publish their MCLR of different maturities every month on a pre-announced date and banks which do not have adequate systems to carry out the review on a monthly basis, can review once a quarter for the first one year, that is, March 31, 2017.
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