After cut, RBI asks banks to review lending rate quarterly

Following its interest rate cut last week after nearly two years, the Reserve Bank (RBI) Monday asked banks to notify the base, or minimum, lending rate at least once every three months based on cost of funds.

"As hitherto, banks are required to review the Base Rate at least once in a quarter with the approval of the board or the Asset Liability Management Committee (ALCO) as per the bank's practice," the RBI said, issuing new guidelines on interest rates on advances.

Commercial banks currently do not maintain a fixed schedule for review of the base rate. While the new guidelines will come into effect from Feb 19, banks will not be allowed to change their methodology during the review cycle.

"While computing Base Rate, banks will have the freedom to calculate cost of funds either on the basis of average cost of funds or on marginal cost of funds or any other methodology in vogue, which is reasonable and transparent provided it is consistent and made available for supervisory review/scrutiny as and when required," RBI said.

The notification also said it has been decided to allow banks to review the Base Rate methodology after three years from date of its finalizing instead of the current period of five years towards greater operational flexibility.

"Accordingly, banks may change their Base Rate methodology after completion of prescribed period with the approval of their Board of Directors/ALCO," it said.