Interest rates on loans are likely to fall, with the Reserve Bank of India (RBI) on Thursday releasing the final guidelines on computing interest rates on advances based on the marginal cost of funds.

The guidelines will be effective from 1 April, 2016.

The RBI said in a press statement that the new guidelines will not only improve transmission of policy rates to the ultimate lending rates of commercial banks but also bring in more transparency in the way banks determine interest rates on advances.

The highlights of the guidelines are as under :

  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) which will be the internal benchmark for such purposes.
  2. The MCLR will be a tenor linked internal benchmark.
  3. Actual lending rates will be determined by adding the components of spread to the MCLR.
  4. Banks will review and publish their MCLR of different maturities every month on a pre-announced date.
  5. 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.
  6. The periodicity of reset shall be one year or lower.
  7. 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.
  8. 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.
  9. Banks will continue to review and publish Base Rate as hitherto.

The Reserve Bank of India (RBI), since January this year, has reduced the repo rate by a cumulative 125 basis points (bps), but only half of it, about 60 bps, has been passed on by banks to borrowers, according to RBI Governor Raghuram Rajan.

A worried RBI has said it will come out with new guidelines for calculating the base rate this week.

"The median base lending rate has declined only by 60 bps since then. There is a particular way to calculate the base rate now. And our worry is it should not come in the way of banks to pass through lower lending rates to customers. That is why we took a relook at the base rate and are coming to the marginal cost pricing which we will be announced later this week," Rajan told reporters after the fifth bi-monthly monetary policy review on 1 December.

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