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RBI announces new rules for calculating Base Rate

RBI announces new rules for calculating Base Rate

The Reserve Bank announced a new and uniform Base Rate formula — moving from average cost of funds methodology to marginal cost of funds methodology for interest rate on advances.

Highlights of RBI’s announcement:

  1. All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR), instead of average or mixed mechanism as adopted by various banks.
  2. Banks will review and publish their MCLR of different maturities every month on a pre-announced date.
  3. 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.
  4. The periodicity of reset shall be one year or lower.
  5. 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.
  6. Existing loans and credit limits linked to the base rate may continue till repayment or renewal, as the case may be. 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.

The new guidelines have the following objectives:

  1. To help borrowers reap the benefit of lower rates,
  2. To improve transparency in the methodology followed by banks for determining interest rates on advances.
  3. To ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks
  4. To help the banks become more competitive and enhance their long run value and contribution to economic growth

Base Rate

  • Base Rate replaced Bank Prime Lending Rate (BPLR) on July 1, 2010.
  • PLR (Prime Lending Rate) Mechanism was in practice since early 1990 s. With too many categories, PLR had become redundant.
  • It is calculated by each bank taking into account the cost of funds, possible loss incurred due to reserve requirements, administrative costs and profit element. Generally banks follow different mechanism to calculate the Base Rate. This helps banks to make most marginal gain.
  • The actual rate of borrower will be the base rate plus borrower specific charges, product – specific operating cost and premium on account of credit risks & tenure.

 

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