Marginal Cost of Funds Methodology for Interest Rate on Advances

The Reserve Bank of India has released the  final guidelines on computing interest rates on advances based on the marginal cost of funds. The guidelines come into effect from April 1, 2016.

Benefits

·       Improve transmission of policy rates into the lending rates of banks,

·   Improve transparency in the methodology followed by banks for determining interest rates on advances.

·       Ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.

·    Help the banks become more competitive and enhance their long run value and contribution to economic growth.

Highlights

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.

ii.  The MCLR will be a tenor linked internal benchmark.

iii. Lending rates will be determined by adding the components of spread to the MCLR.

iv.  Banks will review and publish their MCLR of different maturities every month on a pre-announced date.

v.   Banks may specify interest reset dates on their floating rate loans. They may offer loans with reset dates linked either to the date of sanction or to the date of review of MCLR.

vi.  The periodicity of reset shall be one year or lower.

vii.The MCLR on the date of sanction will be applicable till the next reset date, irrespective of the changes during the interim period.

viii.Existing facilities linked to Base Rate may continue till repayment or renewal.  Existing borrowers will also have the option to move to the MCLR linked loan at  mutually acceptable terms.

 ix.  Banks will continue to review and publish Base Rate as hitherto.

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