RBI tells banks to use MCLR to calculate interest rate on borrowings
Posted on: 30/Mar/2016 9:58:42 AM
The RBI (Reserve Bank of India) has said that fixed rate loans of up to three years will have to be linked to Marginal Cost of Funds based on Lending Rate (MCLR) for determine interest rate. The clarification comes in the wake of the December 2015 directive that asked banks to use marginal rate as a benchmark for fixing lending rates. This was because lenders were not passing on the repo rate cuts to borrowers.
In the past, all fixed rate loans were exempted from being set on the basis of marginal rate. Now, such an exemption will be valid only for loans with a repayment period of over three years.
Analysts feel that this is a negative development for banks. They say that short term loans such as working capital loans and personal loans are better fixed on the basis of marginal rate. Says a senior analyst, The RBI`s decision would hurt the margins of the banks, which are already reeling under bad debts. Our interaction with bankers suggests that banks were thinking of using the fixed rate loan approach to price working capital loans in order to avoid the margin impact. But with most the working capital loans now be linked to the marginal cost of funding, this will affect margins in a downward interest-rate environment.
The RBI has said that to compute MCLR, the balances of the deposits and other borrowings outstanding will be considered. The outstanding will be as on the previous day of the review.
