The new methodology, MCLR, was articulated by the RBI in December 2015.
The main features of the MCLR are:
- It will be a tenor linked internal benchmark, to be reset on an annual basis.
- Actual lending rates will be fixed by adding a spread to the MCLR.
- To be reviewed every month on a preannounced date.
- Existing borrowers will have the option to move to it.
- Banks will continue to review and publish ‘Base Rate’.
- As per the RBI, ‘for monetary transmission to occur, lending rates have to be sensitive to the policy rate’. But this was not occurring by now.
- During 2015-16, the RBI reduced the policy rate (repo rate) by a total of 1.25 percent. But in comparison, banks reduced the lending rate by a maximum 0.6 percent.
By now, banks have been using either of the following three methods to compute their Base Rate:
1) The average cost of funds,
2) The marginal cost of funds, or
3) The blended cost of funds (liabilities).
As per the RBI, the MCLR will bring in the following benefits:
Transmission of policy rate into the lending rates of banks;
Computation of the interest rates by banks will get more transparent;
The cost of a loan will be fairer to the borrowers as well as the banks.
It will help the banks to become more competitive and enhance their long-run value.