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RBI proposes MCLR to replace base lending rates

The Reserve Bank of India has come out with new norms on how banks should calculate their lending rates. This is expected to bring down borrowing costs. Called Marginal Cost of funds based Lending Rate (MCLR), this will ultimately replace the present base rate system. Using MCLR, banks can calculate the lending rate taking into account the marginal cost of funds. In the base rate system, it was left to the individual banks to fix the rate, which essentially was the average cost of funds. RBI said MCLR will be a tenor-linked benchmark, and banks should arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of marginal cost of funds, cost of maintaining cash reserve ratio and operating costs. The new norm comes into effect from 1 April 2016, RBI said, adding under this banks will not be allowed to lend below MCLR, except for few categories like loans against deposits, loans to bank’s own employees, etc. In addition, fixed rate loans, which are typically personal loans and auto loans, will not be linked to MCLR. Banks must also calculate MCLR for different maturities like 1 day, 1 month, three month, six month, and one year.

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