As the Marginal Cost of Funds-based Lending Rates (MCLR) system is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates, by linking the Base Rate to the MCLR, with effect from April 1, 2018, the Reserve Bank of India (RBI) has said. RBI deputy governor NS Vishwanathan told reporters after the Monetary Policy Committee (MPC) meet that the RBI has been concerned about inadequacy of monetary transmission to the base rate and about large number of accounts still being under the base rate regime.
“We are now harmonising the calculation of base rate with the MCLR, so that the responsiveness of the credit portfolio to monetary policy signals is not hindered by interest rate, on large part of banks’ portfolios being linked to base rate,” he said.
See also: Inflation driven by HRA, says RBI governor on status quo on interest rates
The Reserve Bank had introduced the MCLR system with effect from April 1, 2016, on account of limitations in the base rate regime. Home loans taken before April 1, 2016 were based on the base rate, which was arbitrarily decided by banks. Interest rates, which have a bearing on the MCLR, have been moving southwards, post demonetisation.
“With the introduction of the MCLR system, it was expected that the existing Base Rate-linked credit exposures, shall also migrate to MCLR system,” the RBI said in the statement on Developmental and Regulatory Policies, on February 7, 2018. It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate, despite the Reserve Bank of India highlighting this concern in earlier monetary policy statements.
Under the base rate and BPLR, banks were following individual methodologies for computing the minimum rate at which they could lend. Under the MCLR, the RBI asked all banks to follow the marginal cost of funds method, to arrive at their benchmark lending rate. MCLR is calculated, after factoring in banks’ marginal cost of funds (largely, the interest at which they borrow money), return on equity (a measure of banks’ profitability) and negative carry on account of cash reserve ratio.
The RBI has on several occasions, flayed lenders for keeping interest rates high and flagged concerns over base rate and MCLR, saying these have not improved monetary transmission.
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