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Reserve Bank of India to review bank’s MCLR

Posted by BrickAcres on June 8, 2016
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One of the aims of introducing MCLR was to try to make banks pass on
policy rate cut benefits to borrowers. The new methodology has become
effective 1 April 2016. After the start of the marginal cost of funds
-based lending rate (MCLR), the new benchmark to which the pricing of
loans is linked, the Reserve Bank of India (RBI) is looking at
reviewing this regime.

“We will shortly review the operations of MCLR framework to iron out
any issues… It is early days yet, it has been in place only for a
month. We have to see how it transmits into lending rates. There is
an MCLR and banks have to add a spread to it and we have to see how
that moves. So, I think it is going to take a little while before we
can assess fully whether it has the effect intended,” RBI Governor
Raghuram Rajan said.

Many borrowers have felt that their banks have passed on very little
of the previous interest rate cuts and their EMIs have not really
reduced very much. The review by RBI of how banks have implemented
MCLR may put some pressure on banks to pass on the previous rate
cuts more fully. One of the aims of introducing MCLR was to try to
make banks pass on policy rate cut benefits to borrowers.

In its last credit policy review in April this year, the RBI cut the
repo rate by 0.25 per cent to 6.5 per cent. The repo rate is the
rate at which RBI lends to banks. A cut in the repo rate means lower
cost of funds for the banks. Prior to this, the RBI had cut the repo
rate by 1.5 per cent over an 18-month period.

The 0.25 per cent cut in repo rate in April taken together with
reduction in small savings rate and the introduction of MCLR-linked
lending was expected to push banks to cut lending rates. However,
despite all this most borrowers feel that they have not received the
full benefit of these rate cuts from their lenders – banks.

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