New Way for Banks to Compute Interest Rates MCLR

New Way for Banks to Compute Interest Rates

With the general complain being about how full transmission of the RBI's rate cut to the public has not happened, the central bank in December had come out with a new guideline mandating commercial banks to shift to a new form of deciding lending rates. 

The new instructions talk about calculating rates on the basis of the marginal cost of funds-based lending rates from April 1, 2106 onwards. The fresh guidelines would force the banks to revise their lending rates regularly thereby mandating transmist

1. What is MCLR?

MCLR stands for Marginal Cost of Funds Based Lending Rates. This is a new methodology that banks would use to calculate the interest rates on loans and will replace the existing base rate method of calculation.

The RBI has asked banks to implement it from April 1, 2016.

2. Why is the RBI forcing banks to do so?

The RBI has asked banks to implement this method be cause it felt that its interest rate cuts were not reflected in the ultimate bank lending rates for customers. For instance, over the last 15 months the RBI cut policy rate by 125 basis points while banks re duced their lending rate in the range of 50-75 basis points. A basis point is 0.01 percentage point. The RBI hopes that the new methodology would be force banks to cut rates.

3. What is the calculation process under MCLR?

Banks would have to determine their best lending rates on the basis of their cost of funds which has to be calculated ev ery month. The following 4 have to

4. What is new in this methodology?

The most important factor that goes into calculating the lending rate is the cost of funds. Under the base rate system, banks had to factor the average cost of deposits. Under the new method, banks would have to factor in the incremental cost of funds. Lending rates have be revised every month, which makes it dynamic compared to the base rate.

5. What happens to the existing borrowers?

Existing loans and credit limits linked to the Base Rate will continue till repay ment or renewal is due. Existing borrowers will also have the option to move to the MCLR linked loan at mutually acceptable terms.

6. How would banks convey the rates to customers?

Banks will have to review and publish their MCLR of different maturities every month on a pre-announced date. They will specify interest reset dates on their floating rate loans.

Src: Pratik Bhakta, ET

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