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Linking Base Rate with MCLR will improve monetary policy transmission by commercial banks: RBI

Author: IANS/Thursday, February 8, 2018/Categories: Banking & Financial Services

Linking Base Rate with MCLR will improve monetary policy transmission by commercial banks: RBI

Mumbai - In yet another measure to speed up retail transmission by banks of the central bank's cuts in the lending rate, the Reserve Bank of India (RBI) said that it will link the Base Rate with the Marginal Cost of Funds-based Lending Rate (MCLR) from the next fiscal.

The RBI introduced the MCLR from April 1, 2016, as a system working in tandem with its policy rates, which commercial banks have been slow in accepting, preferring to continue with the Base Rate regime.

"With the introduction of the MCLR system, it was expected that the existing Base Rate linked credit exposures shall also migrate to MCLR system," the RBI said in a statement on Developmental and Regulatory Policies 

At its final bi-monthly monetary policy review of the fiscal here on Wednesday, the RBI kept its repo, or short term lending rate for commercial banks, unchanged at 6% for the third time in succession, citing upside risks of inflation from rising global crude oil prices and various domestic factors.

"It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate despite the Reserve Bank highlighting this concern in earlier monetary policy statements," the RBI release said. 

Since the MCLR is more sensitive to policy rate changes, the RBI has decided to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018, it added. 

"We have been mentioning in the earlier policy that we are concerned about inadequacy of monetary transmission to the base rate and about large number of accounts still being under the base rate regime," RBI Deputy Governor N.S. Vishwanathan told reporters here following the policy review announcement. 

"We are now harmonising the calculation of Base Rate with the MCLR so that the responsiveness of the credit portfolio to monetary policy signals is not hindered by interest rate on large part of bank portfolio being linked to base rate," he said, adding that "what we are doing is harmonising and we are not equalising the MCLR with the Base Rate."

The central bank will issue necessary instructions in the matter by the end of next week, the statement said.

As per RBI guidelines, banks have to prepare their MCLR which would serve as the internal benchmark lending rate.

An internal group constituted by the RBI last year to study the MCLR system found that both the Base Rate and MCLR have not helped improve monetary policy transmission by commercial banks.

The MCLR is calculated after factoring in banks' marginal cost of funds, return on equity and negative impact of its cash reserve ratio.

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