On December 17 this year, the Reserve Bank of India (RBI) issued guidelines for calculation of lending rates by banks adopting the marginal cost of funds lending rate (MCLR) while pricing their loans
On December 17 this year, the Reserve Bank of India (RBI) issued guidelines for calculation of lending rates by banks adopting the marginal cost of funds lending rate (MCLR) while pricing their loans.
The guidelines apply for the loans starting next fiscal and will be tenor-based benchmark rate instead of a single base rate.
The components of MCLR are the marginal cost of funds, negative carry on the cash reserve ratio, operating costs and tenor premium. Indian banks currently set their base rates on either their average cost of funds, or marginal cost of funds.
However, because the marginal cost of funds would result in a lower cost of funds amid declining policy rates, banks have not used it, Moody’s said.
“The RBI lowered policy rates by 125 basis points year-to-date while banks have reduced their base rates much less. The RBI expects the shift towards the MCLR calculation to result in lower lending rates for borrowers,” the article states.
The tenor-based lending rates will enable banks to price their loans more efficiently based on their funding composition and strategies, Moody’s said.
For new loans approved from April 1, banks will also be allowed to specify interest reset rates, which are linked either to the date the loan was approved or the date of MCLR review.
The interval between rate resets can be up to one year.
According to Moody’s it provides an additional layer of flexibility for banks to align their overall portfolio lending rates to their overall portfolio deposit costs.