The Reserve Bank of India has been conferred with the powers for regulation of Interest Rate on Advances under Sections 21 and 35 A of the Banking Regulation Act, 1949 (for Co-operative banks 35 A read with section 56). The RBI has issued master directions namely Reserve Bank of India (Interest Rate on Advances) Directions, 2016 vide DBR. Dir. No.85/13.03.00/2015-16 on March 03, 2016 which was subsequently updated on September 04, 2019
Rate of Interest on Advances
Scheduled commercial banks may charge interest on advances as per comprehensive policy on interest rates on advances duly approved by the Board of Directors
Benchmark Prime Lending Rate (BPLR)
Benchmark Prime Lending Rate (BPLR) was internal benchmark rate used to determine the interest rates on advances/loans sanctioned upto June 30, 2010.
Base Rate
All floating rate rupee loans sanctioned and renewed between July 1, 2010 and March 31, 2016 has been priced with reference to the Base Rate. There can be only one Base Rate for each bank. Banks had 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 which is reasonable and transparent subject to supervisory review/scrutiny. Banks can review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs). The existing borrowers desirous of switching to the new Base Rate system, before expiry of the existing contracts shall be given an option on mutually agreed terms, however no fee is charged for such switch-over.
MCLR
All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 has to be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR). The MCLR comprise of
- Marginal cost of funds: It comprise of Marginal cost of borrowings and return on networth
- Negative carry on account of CRR: Negative carry on the mandatory CRR which arises due to return on CRR balances being nil, is calculated as under: Required CRR x (marginal cost) / (1- CRR)
- Operating costs: All operating costs associated with providing the loan product including cost of raising funds is included, however the costs of providing those services which are separately recovered by way of service charges do not form part of this component.
- Tenor premium: The tenor premium is uniform for all types of loans for a given residual tenor
The banks publish the internal benchmark for the following maturities:
- overnight MCLR,
- one-month MCLR,
- three-month MCLR,
- six month MCLR,
- One year MCLR.
Banks should review and publish their MCLR of different maturities every month on a pre-announced date. The existing borrowers shall have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms
The formula to drive MCLR is:
Marginal cost of funds = 92% x Marginal cost of borrowings + 8% x Return on networth
External benchmark rate
All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to External benchmark. External benchmark rate means the reference rate which includes:
- Reserve Bank of India policy Repo Rate
- Government of India 3-Months and 6-Months Treasury Bill yields published by Financial Benchmarks India Private Ltd (FBIL)
- Any other benchmark market interest rate published by FBIL.
Banks are free to offer such external benchmark linked loans to other types of borrowers as well. Banks are free to decide the spread over the external benchmark. However, credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change. Other components of spread including operating cost could be altered once in three years. The floating rate term loans sanctioned to borrowers who are eligible to prepay a floating rate loan without pre-payment charges, shall be eligible for switchover to External Benchmark without any charges/fees, except reasonable administrative/ legal costs.
Master Circulars – Regulation of Interest Rate on Advances
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