The Reserve Bank of India (RBI) on Wednesday said it is working on a framework to harmonise the calculation of banks’ base rates with their marginal cost of funds-based lending rates (MCLRs). Guidelines pertaining to the same will be issued by the end of next week, RBI said, and will come into effect on April 1, the second anniversary of the implementation of the MCLR framework. The central bank reiterated its concern around the inadequate degree of transmission of past rate cuts through the MCLR system. In its statement on developmental and regulatory policies, RBI said, “With the introduction of the MCLR system, it was expected that the existing base rate linked credit exposures shall also migrate to MCLR system. It is observed, however, that a large proportion of bank loans continue to be linked to the base rate despite the Reserve Bank highlighting this concern in earlier monetary policy statements.”
On January 16, FE had reported that most banks had communicated their reluctance to link lending rates to an external benchmark, as proposed by a committee set up by the central bank. NS Vishwanathan, deputy governor, RBI said at a post-policy press conference that a significant portion of banks’ loan books are still tied to base rates. “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 rates and a large part of banks’ portfolio being linked to base rate,” Vishwanathan said, adding, “I want to again clarify that what we are doing is harmonising, and not equalising the MCLR with base rate.”
Bankers, however, said the move will not have much of an impact as most floating-rate loans in the system have already migrated to MCLR from base rate. Ashutosh Khajuria, executive director and chief financial officer at Federal Bank, said the impact on banks’ returns will be limited. “Banks have not changed their base rate materially. So return on advances will fall to that extent. But, on the other hand, 80-85% of loans have already got migrated to MCLR. There will be an impact on yields, but it will be limited.”
Loans typically come up for renewal once a year, and the borrower then gets an opportunity to move it from the base rate regime and link it to the MCLR. Alternatively, a borrower can migrate with immediate effect on payment of a fee. Bankers say the process of migration will, by default, be completed by April 2018. Karthik Srinivasan, senior vice-president, ICRA, said the fineprint on the proposal will be crucial to assess its impact on banks. “While the data on the share of base rate-linked loans is not readily available, my guess is about 25-30% of the credit is still linked to base rate,” he said. Since April 2016, State Bank of India’s one-year MCLR has fallen by 125 bps to 7.95%, while its base rate has fallen 65 bps to 8.65%.