All rupee loans sanctioned and credit limits renewed with effect from April 1, 2016 will be priced with reference to MCLR
The Reserve Bank of India (RBI) on Thursday notified guidelines for banks for pricing their advances with reference to the marginal cost of funds based lending rate (MCLR). Currently the base rate, the minimum lending rate, is priced with reference to the average cost of funds.
“Banks may specify interest reset dates on their floating rate loans and 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 central bank said.
RBI said all rupee loans sanctioned and credit limits renewed with effect from April 1, 2016 will be priced with reference to the MCLR which will be the internal benchmark for such purposes. The central bank has been encouraging banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their base rate to enable a better transmission of rate movement through the system.
MCLR will consist of four components namely marginal cost of funds, negative carry on account of CRR, operating costs and tenor premium. The central bank has provided the methodology on its website to calculate the marginal cost of funds and the negative carry on account of CRR.
RBI also pointed out that all operating costs associated with providing the loan product including cost of raising funds will be included under the operating costs. “It should be ensured that the costs of providing those services which are separately recovered by way of service charges do not form part of this component,” it said.
As far as the fourth component is concerned, RBI said that the change in tenor premium should not be borrower-specific or loan class-specific. “In other words, the tenor premium will be uniform for all types of loans for a given residual tenor,” the central bank stated.
Since MCLR will be a tenor-linked benchmark, banks will have to arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of marginal cost of funds, negative carry on account of CRR and operating costs.
Banks will also have to publish the internal benchmark for the maturities that include overnight MCLR, one-month MCLR, three-month MCLR, six-month MCLR and one-year MCLR. In addition to that, banks have the option of publishing MCLR of any other longer maturity.
In regard to the spreads charged to a customer, RBI said that banks should have a board approved policy delineating the components of spread. The policy should include principles to determine the quantum of each component of spread, the range of spread for a given category of borrower/type of loan and to delegate powers in respect of loan pricing.
Actual lending rates will be determined by adding the components of spread to the MCLR. Accordingly, there will be no lending below the MCLR of a particular maturity for all loans linked to that benchmark, the guidelines stated.
Banks will also have to review and publish their MCLR of different maturities every month on a pre-announced date with the approval of the board or any other committee to which powers have been delegated.
RBI added that banks which do not have adequate systems to carry out the review of MCLR on a monthly basis, may review their rates once a quarter on a pre-announced date for the first one year i.e. up to March 31, 2017.
Existing loans and credit limits linked to the base rate may continue till repayment or renewal and banks are to continue reviewing and publishing base rate. Existing borrowers will also have the option to move to the MCLR linked loan at mutually acceptable terms. However, this should not be treated as a foreclosure of existing facility, RBI said.
Commenting on the development, SBI chairman Arundhati Bhattacharya said, “While these guidelines will benefit the new customers, existing customers will also have an option to shift to the new regime with some conditions. Sufficient time has been given to banks to switch over to the new regime of marginal cost of funds-based lending rate as the same has been made effective from April 1.”
The central bank has also detailed the category of loans that are exempt from being linked to MCLR. Loans covered by schemes specially formulated by Government of India wherein banks have to charge interest rates as per the scheme, are exempted from being linked to MCLR as the benchmark for determining interest rate.
Working Capital Term Loan, Funded Interest Term Loan, etc. granted as part of the rectification/restructuring package, are also exempted from being linked to MCLR.
Loans granted under various refinance schemes formulated by government of India or any government undertakings wherein banks charge interest at the rates prescribed under the schemes to the extent refinance is available are exempted from being linked to MCLR. However, interest rate charged on the part not covered under refinance should adhere to the MCLR guidelines.