System of Base Rate and Interest Rate
The RBI vide its Circular No. DBR.No.Dir.BC.9/13.03.00/2015-16 dated April 1, 2015and DBR.No.Dir.BC.67/13.03.00/2015-16 dated December 17, 2015 on “Interest Rates on Advances” required the banks to freely determine the lending rates on the advances as per their Board approved policy subject to the guidelines contained in the bcircular. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. Accordingly, the following is the summary guidelines were issued by RBI for implementation by banks. For detailed guidelines, refer above mentioned RBI circulars:
Banks were required to obtain the approval of their respective Boards for the Prime Lending Rate which was the minimum rate charged by them for the credit limits of over Rs 2 lakhs. In case of loans up to Rupees two lakh, it was decided to continue to protect these borrowers by prescribing the lending rates. With effect from April 29, 1998, it was decided that interest on Credit limit of Rs. 2 lakh and below shall not exceed PLR which was available to the best customer of the concerned bank. In order to enhance transparency in bank’s pricing of their loan products as also to ensure that the PLR truly reflects the actual cost, in year 2003, it was decided to abolish the prescription of minimum lending rate for credit limits of over Rupees two lakh and banks were given the freedom to fix the lending rates for such credit limits subject to Benchmark Prime Lending Rate (BPLR) and spread guidelines. Banks were required to obtain the approval of their respective Boards for the BPLR, which would be the reference rate for credit Iimits of over Rs. 2 lakh. Each bank’s BPLR had to be declared and be made uniformly applicable at all branches. BPLR continued to be the ceiling rate of interest for advances upto Rs. 2 lakh.
Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. There can be only one Base Rate for each bank. Banks may choose any benchmark to arrive at the Base Rate that may be disclosed transparently.Banks are free to use any other methodology, as considered appropriate, provided it is consistent and is made available for supervisory review/scrutiny, as and when required.
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 Committees (ALCOs) as per the bank’s practice. Banks are allowed to review Base Rate methodology after three years from date of its finalizationwith the approval of their Board of Directors/ ALCO.
All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes. Audit teams should verify whether new loans sanctioned and credit limits renewed post April 1, 2016 is under the new MCLR regime.
The MCLR will comprise of Marginal cost of funds, Negative carry on account of CRR, Operating costs and Tenor premium.