Linking bank's base rate to MCLR for loans will bring relief to borrowers

Linking bank's base rate to MCLR for loans will bring relief to borrowers

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From April 1, banks will have to link the base rate with the MCLR in order to ensure quicker transmission of policy rates to existing loan interest rate to borrowers, the Reserve Bank of India said on Wednesday.

RBI introduced the Marginal Cost of Funds based Lending Rates (MCLR) system with effect from April 1, 2016 to facilitate greater passing on of the benefit of reduction in policy rates to lending rates.

The base rate regime (loans taken before April 1, 2016) led to slower pass through.

The MCLR for 1-year tenure loan for country's biggest lender State Bank of India (SBI) stands at 7.95 percent for the month of January 2018 while its base rate still stands at 8.65 percent.

The 1-year MCLR for most commercial banks as on January 2018 ranges between 7.95 percent and 9.75 percent.

“With the introduction of the MCLR system, it was expected that the existing Base Rate linked credit exposures shall also migrate to MCLR system,” RBI said in the statement on Developmental and Regulatory Policies.

It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate despite the RBI highlighting this concern in earlier monetary policy statements.

“Since MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from 1 April 2018,” t...

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