Sunday, December 20, 2015

Interest Rates on Advances

a)    Internal Benchmark 
i.          All rupee loans sanctioned and renewed w.e.f. April 1, 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.

ii.         The MCLR will comprise of:
a.     Marginal cost of funds;
b.    Negative carry on account of CRR;
c.     Operating costs;
d.    Tenor premium.

iii.         Marginal Cost of funds
The marginal cost of funds will comprise of Marginal cost of borrowings and return on networth.

iv.         Negative Carry on CRR
Negative carry on the mandatory CRR, which arises due to return on CRR balances being nil, will be calculated as under:
Required CRR x (marginal cost) / (1- CRR)
The marginal cost of funds arrived at (iii) above will be used for arriving at negative carry on CRR.

v.          Operating Costs
All operating costs associated with providing the loan product, including the cost of raising funds will be included under this head.

vi.         Tenor premium
These costs arise from loan commitments with longer tenor. The tenor premium will be uniform for all types of loans for a given residual tenor.

vii.        Since MCLR will be a tenor linked benchmark, banks shall arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of Marginal cost of funds, Negative carry on account of CRR and Operating costs.

viii.   Accordingly, banks shall publish the internal benchmark for the following maturities:
a.     overnight MCLR,
b.    one-month MCLR,
c.     three-month MCLR,
d.    six month MCLR,
e.     One year MCLR.
Banks have the option of publishing MCLR of any other longer maturity.

b)    Spread 
i.      Banks should have a policy delineating the components of spread charged to a customer which shall include principles:
a.  To determine the quantum of each component of spread.
b.    To determine the range of spread for a given category of borrower / type of loan.
c.     To delegate powers in respect of loan pricing.

ii.         All banks shall adopt the following broad components of spread:

a.     Business strategy
The component will be arrived at taking into consideration the business strategy, market competition, embedded options in the loan product, market liquidity of the loan etc.

b.    Credit risk premium
The credit risk premium representing the default risk should be arrived at based on an appropriate credit risk rating/scoring model and after taking into consideration customer relationship, expected losses, collaterals, etc.

iii.         The spread charged to an existing borrower should not be increased except on account of deterioration in his credit risk profile. Such deterioration should be supported by a full-fledged risk profile review of the customer.

iv.         This stipulation is not applicable to loans under consortium / multiple banking arrangements.

c)    Interest Rates on Loans 
i.       Actual lending rates will be determined by adding the components of spread to the MCLR. Accordingly, there will be no lending below the MCLR of a particular maturity for all loans linked to that benchmark

ii.         The reference benchmark rate used for pricing the loans should form part of the terms of the loan contract.

d)   Exemptions from MCLR
   i.          Loans covered by schemes specially formulated by Government of India.

ii.      Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the rectification/restructuring package.

iii.     Loans granted under various refinance schemes formulated by Government of India or any Government Undertakings. Interest rate charged on the part not covered under refinance should adhere to the MCLR guidelines.

iv.         The following categories of loans can be priced without being linked to MCLR:
(a)  Advances to banks’ depositors against their own deposits.
(b) Advances to banks’ own employees including retired employees.
(c) Advances granted to the Chief Executive Officer / Whole Time Directors.
(d) Loans linked to a market determined external benchmark.
(e)   Fixed rate loans granted by banks. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.

e)    Review of MCLR
 i.          Banks shall review and publish their Marginal Cost of Funds based Lending              Rate (MCLR) of different maturities every month on a pre-announced date.
 ii.         However, banks which do not have adequate systems to carry out the review on a         monthly basis, may review their rates once a quarter upto March 31, 2017.                    Thereafter, they should adopt the monthly review of MCLR as above.

f)     Reset of interest rates
i.          Banks may specify interest reset dates on their floating rate loans. Such reset dates may either be linked to the date of sanction or to the date of review of MCLR.
ii.         The Marginal Cost of Funds based Lending Rate (MCLR) prevailing on the day of sanction will be applicable till the next reset date, irrespective of the changes in the interim period.
iii.         The periodicity of reset shall be one year or lower. The exact periodicity shall form part of the terms of the loan contract.

g)    Treatment of interest rates linked to Base Rate charged to existing borrowers
i.          Existing loans and credit limits linked to the Base Rate may continue till repayment or renewal, as the case may be.
ii.         Banks will continue to review and publish Base Rate as hitherto.
iii.         Existing borrowers will also have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.

h)    Time frame for implementation
All the banks should move to the MCLR based pricing, with effect from April 1, 2016.

Based on RBI Circular dt 17/12/15. Please visit for any further clarification if required…..   Poppy