RBI's new methodology of base rate calculation starting 1 April to usher in transparency

Mumbai: To improve transparency and ensure speedier monetary policy transmission, the RBI on Thursday said that all banks will have to follow a new uniform methodology from the next fiscal for calculation of base rate on the basis of the marginal cost of funds. The new methodology will ensure fair interest rates to borrowers as well as to banks. As per the final guidelines, banks will fix their lending rates as per their marginal cost of funding every month, which will be based on the rate offered on new deposits. Under the current system, banks fix their lending rates based on the average rate of outstanding deposits. [caption id=“attachment_2443966” align=“alignleft” width=“380”]  The RBI logo. Reuters[/caption] The RBI said all banks will follow a uniform methodology for calculation of base rate or minimum lending rate on the basis of the marginal cost of funds from 1 April, 2016. “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,” the RBI said. Welcoming the final guidelines, SBI Chief Arundhati Bhattacharya said this will be valid on new loans taken thereafter as well as loans getting renewed after that date. “While these guidelines will benefit the new customers, existing customers will also have an option to shift to the new regime with some conditions,” she said. “With marginal cost of funds including tenor premium, we have moved closer to international manner of benchmark rates,” she added. RBI Governor Raghuram Rajan has on many occasions expressed his resentment over inordinate delays by banks in passing on interest rate cuts. Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis points. As per the final guidelines: “All rupee loans sanctioned and credit limits renewed w.e.f. 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.” Many banks currently follow average cost of funds or ‘blended cost of funds (liabilities) method’ for calculating the base rate, while a few already take into account the proposed measure of ‘marginal cost of funds’. RBI said the 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 said. 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 the changes in the benchmark during the interim period,” the RBI said. Existing loans and credit limits linked to the Base Rate “may continue till repayment or renewal”, the RBI said, adding the existing borrowers will also have the option to move to the MCLR linked loan at mutually acceptable terms. It further said that banks will continue to review and publish Base Rate as hitherto. The Base Rate mechanism has been operational from 1 July, 2010. Banks fix their actual lending rates on loans and advances with reference to the base rate, a rate below which it cannot lend. PTI