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Base rate linked with MCLR: Home loans taken before Apr 2016 may be cheaper

Home loans taken before April 1, 2016 were based on base rate, which was arbitrarily decided by banks

Press Trust of India  |  New Delhi 

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Old home loans are likely to become cheaper with the asking to link from April 1 the base rate with MCLR, which is more sensitive to policy rate signals. The Reserve Bank had introduced the Marginal Cost of Funds based Lending Rates (MCLR) system with effect from April 1, 2016 on account of limitations in the base rate regime. Home loans taken before April 1, 2016 were based on base rate, which was arbitrarily decided by Interest rates, which have a bearing on the MCLR, has been moving southwards post demonetisation. "With the introduction of the MCLR system, it was expected that the existing Base Rate linked credit exposures shall also migrate to MCLR system," said in the statement on Developmental and Regulatory Policies yesterday. It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate despite the Reserve Bank of India highlighting this concern in earlier monetary policy statements. "Since MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018," the said. Deputy Governor NS Vishwanathan said told reporters after MPC meet that the has been concerned about inadequacy of monetary transmission to the base rate and about large number of accounts still being under the base rate regime. "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. Under the base rate and BPLR, were following individual methodologies for computing the minimum rate at which they could lend.

Under the MCLR, asked all to follow the marginal cost of funds method to arrive at their benchmark lending rate. MCLR is calculated after factoring in banks' marginal cost of funds (largely, the interest at which they borrow money), return on equity (a measure of banks' profitability), and negative carry on account of cash reserve ratio. The has on several occasions flayed lenders for keeping interest rates high and flagged concerns over base rate and MCLR, saying these have not improved monetary transmission.

First Published: Thu, February 08 2018. 19:26 IST