RBI guidelines to fast-track transmission of policy rates

RBI guidelines to fast-track transmission of policy rates

New rules to come into effect from April 1, 2016

RBI guidelines to fast-track transmission of policy rates

The Reserve Bank of India has announced new rules on computing interest rates based on marginal cost of funds. The new computation is likely to bring rates more close to market rates, besides helping borrowers as the transmission will happen much quicker.

The guidelines will come into effect from April 1, 2016. Apart from helping improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances.

The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as banks. Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long run value and contribution to economic growth, RBI said.

According to the Reserve Bank of India circular, all rupee loans sanctioned and credit limits renewed with effect from April 1, 2016, will be priced with reference to the marginal cost of funds based lending rate (MCLR) which will be the internal benchmark for such purposes, and will be a tenor-linked internal benchmark.

The MCLR will comprise of marginal cost of funds, negative carry on account of CRR, operating costs, and tenor premium.

The periodicity of reset shall be one year or lower, and the MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period.

Focus on transparency

     RBI’s new computation to bring rates more close to market rates
     These measures to improve transparency in the methodology



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