RBI released final guidelines of Marginal Cost of Funds Methodology to calculate Interest Rates

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Who: Reserve Bank of India
What: Released guidelines of Marginal Cost of Funds Methodology
When: 17 December 2015
Why: To calculate interest rates on advances

The Reserve Bank of India (RBI) on 17 December 2015 released the final guidelines on computing interest rates on advances based on theMarginal Cost of Funds Methodology. The guidelines will come into effect from 1 April 2016.

The new methodology is aimed at bringing uniformity among BRs of banks so that they will be more sensitive to any changes in policy rates of the RBI like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), etc.

Highlights of the guidelines

  • All rupee loans sanctioned and credit limits renewed with effect from 1 April 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.
  • 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 option to offer loans with reset dates linked either to date of sanction of the loan or to the date of review of MCLR.
  • The periodicity of reset shall be one year or lower.
  • The MCLR prevailing on the day loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period.
  • 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 MCLR linked loan.
  • Banks will continue to review and publish Base Rate as hitherto.

Advantages of MCLR Methodology

  • This new methodology will help improve the transmission of policy rates into the lending rates of banks.
  • 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.
  • Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long run value and contribution to economic growth.