The Reserve Bank of India today said it is looking to link base rate to the marginal cost based lending rate.
This linkage of two rates will come into effect from April 1, 2018, the RBI noted in its statement on regulatory developments accompanying the monetary policy statement. Detailed guidelines will be released next week, the central bank said, without specifying how the linkage would work.
“With the introduction of the MCLR system, it was expected that the existing base rate linked credit exposures shall also migrate to MCLR system. It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate despite the Reserve Bank highlighting this concern in earlier monetary policy statements,” the central bank said in its statement.
According to data released by the RBI, the weighted average lending rates of scheduled commercial banks in India was at 9.41 percent in December 2017, as compared with a one year MCLR of 8.3 percent.
The base rate was introduced in 2010 as a replacement to the benchmark prime lending rate, which was prevalent till then. According to RBI’s definition, the base rate would take into account the average cost of funds, negative carry on mandatory ratios to be maintained by the bank, the average return on net worth and unallocatable overhead cost. Lenders were asked to use the base rate as the minimum lending rate they could charge a customer and then add a risk premium to it, depending on the quality of customer they were dealing with.
In April 2016, after base rate did not adequately transmit the rate reductions made by the central bank, the RBI came out with MCLR as the minimum lending rate for banks to implement. MCLR took into account the marginal cost of funds, which was more sensitive to the changes in benchmark rates by the RBI. The regulator had also created a mechanism where customers who were on the base rate could move on to the MCLR regime by paying a fee.
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