RBI's new lending norms

The Reserve Bank of India (RBI) on Thursday unveiled new guidelines on how banks can calculate their lending rates in a bid to make them more closely based on market rates and allow quicker transmission of the monetary policy. The new norms will come into effect on April 1, 2016.

According to the RBI, banks will set their lending rates under the marginal cost of funds (deposits) every month, which will be based on the rate offered on new deposits, which would reflect the market rates. Many banks had sharply cut deposit rates recently but their lending rate reduction has failed to match deposit rates.

“While these guidelines will benefit new customers, existing customers will also have an option to shift to the new regime with some conditions. Sufficient time has been given to banks to switch over to the new regime. We have moved closer to international manner of benchmark rates,” SBI chairman Arundhati Bhattacharya said. Under the current system, banks set their lending rates based on the average rate of outstanding deposits, a system that had given them more freedom to determine how much to charge.

“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 on lending rate (MCLR) linked loan at mutually acceptable terms. Banks will continue to review and publish Base Rate as hitherto,” the RBI said in the final guidelines.

Apart from helping improve the transmission of policy rates into the lending rates of banks, the new RBI measures may also improve transparency in the methodology followed by banks for determining interest rates on advances. The guidelines are also expected to ensure availability of bank credit at rates which are fair to the borrowers as well as the banks. Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long-run value and contribution to economic growth.

Banks will review and publish their MCLR of different maturities every month on a pre-announced date. “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. The periodicity of reset shall be one year or lower,” the RBI said.

“MCLR will be a tenor-linked internal benchmark. Actual lending rates will be determined by adding the components of spread to the MCLR,” the RBI said. It was observed that Base Rates based on marginal cost of funds are more sensitive to changes in the policy rates, it added.

Unveiling the bi-monthly monetary policy earlier this month, RBI Governor Raghuram Rajan said the marginal cost of fund calculation offers banks flexibility to move more quickly while the base rate calculated under the average cost will not allow them to do so and react to competition from the markets.