The RBI had introduced a Marginal Cost of Funds-based Lending Rate or MCLR system with effect from April 1, 2016. This was done due to the limitations of the base rate regime. With the introduction of the MCLR system, it was expected that the existing base rate-linked credit exposures would move to the new system.
Under the MCLR - the minimum lending rate below which a bank can't lend to customers - system, the rate is calculated by using the cost incurred on incremental deposits, not average cost of deposits. The interest rate charged under the base rate is higher compared to the MCLR regime.
Borrowers under the base rate regime typically have to pay a fee to switch to the MCLR regime.
The RBI said in a statement that despite the MCLR system being introduced, "a large proportion of bank loans continue to be linked to the base rate".
"Since MCLR is more sensitive to policy rate signals, it has been decided to harmonize the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018. Necessary instructions will be issued by the end of next week," the RBI said in a statement.
“While the MCLR has reduced 100 basis points since April 2016, base rate has reduced only 40 basis points. RBI plans to link the MCLR to base rate to make monetary transmission more efficient,” domestic brokerage Edelweiss said in a note.
#ChartoftheDay Gap between MCLR and Base rate to be harmonized#BaseRate is the minimum rate beyond which #banks cannot lend to its #customers, normally reserved for its preferential #corporate borrowers.— Edelweiss Wealth Management (@Edelweissonline) February 9, 2018
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