RBI Mulls Replacing MCLR Regime

RBI Mulls Replacing MCLR Regime

RBI Mulls Replacing MCLR Regime

Sensing that banks were not passing on the benefits of monetary transmission to borrowers, the Reserve Bank of India (RBI) has in 2016 launched a new lending methodology ─ the marginal cost of funds-based lending rate (MCLR) regime. All loans borrowed on floating interest rates were issued using the new methodology.

The new lending benchmark replaced the previous base rate system which was operational since 2010. Prior to that, banks lent to customers using the Benchmark Prime Lending Rate (BPLR) system.

Several changes made by the RBI in the past 20 years have primarily been aimed at benefitting the borrowers. However, that target is far from achieved, and the new regime did little to meet it.

"Given the prevailing liquidity conditions and that we have reduced policy rates by a substantial amount since the start of easing cycle, I think there is scope for banks to reduce the lending rate for those segments. So far, they have not benefited to the full extent of our policy rate cuts," RBI Governor Urjit Patel had said in August last year.

Since borrowers did not get the intended benefit, the banking regulator is now considering scrapping the new regime, which came into effect in April 2016, too.

In its annual report for 2017-18, the RBI has said it would review the MCLR regime for the purpose of re-orienting the banking structure in India”. If the MCLR regime does get scrapped, banks may have to link interest rates to an external lending benchmark.

“World over, bank rates have moved to an external lending benchmark which leads to uniform pricing. Banks in India currently calculate based on their internal benchmark which can be disputed and leads to a difference in rates among banks,” a banking official was quoted as saying in The Economic Times.

An internal panel, set up by the RBI to examine various aspects of the MCLR system has last year recommended linking of the bank lending rates to external benchmarks. The panel submitted its report to the RBI on September 24. The panel had proposed that lending rates might be tied to three lending benchmarks ─ Treasury Bill Rate, Certificate of Deposit Rate and RBI’s policy repo rate ─ to improve policy transmission.

Also read: Why Rate Cuts By RBI Benefit You Too Little, Too Late

New Lending Benchmark May Make Loans Cheaper

Last Updated: Fri Aug 31 2018

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