Fixed rate loans up to 3 years to be based on marginal cost: RBI

From next month, all banks will follow Marginal Cost of Funds based Lending Rate (MCLR) system, a new uniform methodology which will ensure fair interest rates to borrowers as well as to banks.

Fixed rate loans up to 3 years to be based on marginal cost: RBI

Mumbai: In a bid to ensure speedier monetary policy transmission, Reserve Bank on Tuesday asked banks to price fixed rate loans of up to three years based on their marginal cost of fund from April 1.

From next month, all banks will follow Marginal Cost of Funds based Lending Rate (MCLR) system, a new uniform methodology which will ensure fair interest rates to borrowers as well as to banks.

Tweaking some provisions relating to the MCLR system, RBI said: "On a review, it has been decided that fixed rate loans up to three years shall be priced with reference to MCLR."

However, fixed rate loans of tenor above three years will continue to be exempted from MCLR system.

As per the guidelines issued in December, the fixed rate loans were exempted from being linked to MCLR as the benchmark for determining interest rate.

The new norms would ensure interest margins are linked to market rates, thus eliminating banks' discretion in pricing of loans.

Under MCLR, banks will fix their lending rates as per their marginal cost of funding every month, which will be based on the rate offered on new deposits. Currently most of the banks fix their lending rates based on the average rate of outstanding deposits.

On computing Marginal Cost of Funds, RBI said banks will have the option to reckon the outstanding balances of deposits and other borrowings as on any day, not more than seven calendar days, prior to the date from which the MCLR becomes effective. The chosen time lag shall be maintained consistently for a period not less one year.

As per the December norms, balances of deposits and other borrowings outstanding as on the previous day of review was to be reckoned.

On effective date for applying MCLR on floating rate loan, RBI said now it has been decided that MCLR prevailing on the date of first disbursement, whether partial or full, will be applicable on the floating rate loan and future reset dates determined accordingly.

Referring to MCLR of various maturities, RBI said the tenor of the funds in the single largest maturity bucket, provided it is more than 30 percent of the entire funds will be reckoned.

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