The Reserve Bank of India on Tuesday directed that banks will have to set the interest rate for fixed-rate loans of up to three years based on their Marginal Cost of Funds based Lending Rate (MCLR), which will ensure that any interest rate cut by the central bank would be immediately passed on to end consumers.
At present, all fixed-rate loans are exempted from being linked to the MCLR-based calculation. Loans with tenures of over three years will continue to be exempt. At present banks set lending rates based on the average cost of funds, not marginal cost.
The new rules become applicable on April 1.
They would ensure banks adjust their loan rates based on market rates, and end the uneven charges for loans by some banks and bring in more transparency.
RBI has also given banks the option to reckon the outstanding balances of deposits and other borrowings as on any day, not more than seven calendar days prior to the date from which the MCLR becomes effective. The chosen time lag shall be maintained consistently for more than one year.
For floating-rate loans, the MCLR prevailing on the date of first disbursement (rather than the date on which the loan is sanctioned), whether partial or full, shall be applicable, and future reset dates determined accordingly.
Banks were earlier required to publish MCLR for various tenors but now for only the tenor of the funds in the single largest maturity bucket, if it is more than 30% of the entire funds reckoned for determining the MCLR. If no single maturity bucket accounts for over 30% of funds then weighted average of tenor of two or more maturity buckets accounting for more than 30%.