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RBI says banks to follow new methodology from April to ensure better transmission of rate cuts to borrowers

THE Reserve Bank of India ( RBI) announced new rules for banks to calculate their lending rates on Thursday in order to allow quicker transmission of its rate cuts to borrowers.

Under the new rules, which will come into effect from April1 1, 2016, commercial banks must set their lending rates with reference to the marginal cost of funding every month, which is based on the cost of new deposits.

Under the current system, banks set their lending rates based on the average rate of outstanding deposits, a system that had given them more freedom to determine how much to change. This was causing a delay in lowering lending rates on loans granted to consumers and corporates even after the RBI cuts its key rates. Apart from helping borrowers get benefits of lower rates, the step also aims to improve transparency in the methodology followed by banks for determining interest rates on advances.

The RBI said, " 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." The marginal cost of fundsbased lending rate ( MCLR) will be a tenor- linked internal benchmark and 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, the RBI added.

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 changes in the benchmark during the interim period, the RBI further added.

Existing loans and credit limits linked to the base rate may continue till repayment or renewal and existing borrowers will also have the option to move to the MCLR- linked loan at mutually acceptable terms, the RBI said.

RBI governor Raghuram Rajan has repeatedly expressed his frustration over banks' reluctance to quickly lower their lending rates even as the Central bank has aggressively eased its interest rates.

Lending rates to be set with reference to marginal cost of funding

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Publication:Mail Today (New Delhi, India)
Date:Dec 18, 2015
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