RBI forms group to improve marginal cost of lending rate system

5 Dariya News

Mumbai 02-Aug-2017

The Reserve Bank of India (RBI) has constituted an internal group to study the marginal cost of lending rate (MCLR) system for commercial banks designed to improve monetary policy transmission, RBI Deputy Governor Viral Acharya said on Wednesday."The experience with the MCLR system introduced in April 2016 has not been entirely satisfactory," Acharya told reporters here following announcement of the RBI's third bi-monthly monetary review of the current fiscal."The RBI will constitute an internal study group to study various aspects of the MCLR system. This group will submit its report by September 2017," he added. The Reserve Bank of India on Wednesday cut its repo, or short-term lending rate for commercial banks, to 6 per cent from 6.25 per cent. Introduced from April 2016 as an advance over the base rate system, MCLR is a new methodology for setting the lending rate by commercial banks to facilitate monetary transmission. It is mandatory for banks to consider the repo rate while calculating their MCLR.

As per RBI guidelines, banks have to prepare MCLR which will be the internal benchmark lending rate. Based upon this MCLR, interest rates for different categories of customers are fixed in accordance with their degree of risk.After the 0.25 per cent cut in the repo rate by the RBI on Wednesday, the cost of funds for the banking system is expected to come down further.Home loan borrowers are expwected to benefit from lower EMI's as a bank's cost of funds, as reflected by its MCLR is also expected to come down.Following Wedensday's policy review, the RBI said that base rates of banks will also be scrutinised as base rates have moved more slowly than MCLR."While the extent of change in Base Rate may not necessarily mirror the revision in MCLR, the rigidity of Base Rate is a matter of concern for an efficient transmission of monetary policy to the real economy," the apex bank said."Given a large part of the floating rate loan portfolio of banks is still anchored on the Base Rate, the RBI will be exploring various options in the near future to make the Base Rate more responsive to changes in cost of funds of banks," its added.