RBI constitutes internal group to improve MCLR

The Reserve Bank of India (RBI) has constituted an internal study group to study the marginal cost of funds based lending rate ( MCLR) to improve monetary policy transmission, the central bank said in a statement after the third bi-monthly monetary policy review.

“The experience with the Marginal Cost of Funds Based Lending Rate (MCLR) system introduced in April 2016 for improving the monetary transmission has not been entirely satisfactory, even though it has been an advance over the base rate system,” RBI said.

The study group will also explore linking the bank lending rates directly to market determined benchmarks and will submit its report by September 24, RBI said. The central bank did not elaborate on what exactly is the problem with the current MCLR regime.

The new MCLR regime was implemented in the fiscal year starting April 2016. It applies to all new borrowers and is closely linked to bank deposits rates. All new floating rate loans are now linked to MCLR.
RBI said that base rates of banks will also be scrutinised as base rates have moved more slowly than MCLR.

“While the extent of change in Base Rate may not necessarily mirror the revision in MCLR, the rigidity of Base Rate is a matter of concern for an efficient transmission of monetary policy to the real economy. Given a large part of the floating rate loan portfolio of banks is still anchored on the Base Rate, the RBI will be exploring various options in the near future to make the Base Rate more responsive to changes in cost of funds of banks,” RBI said.
The key difference between MCLR and the previous base rate regime is that the new rates are divided into different baskets corresponding to bank deposits.