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New lending rate regime from April 1

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Banks to compute lending rates under new rules to pass on RBI rate cut benefits to borrowers
In a bid to force lenders to effectively pass on policy rate cuts, the Reserve Bank of India ( RBI) on Thursday said from April 1, 2016, banks must review their lending rates frequently, and reflect changes in their cost of borrowing.
But customers taking loans at any given point cannot reset the terms before a specified period agreed upon at the time of the contract, usually a quarter or a year.
The new lending rates, named Marginal Cost of Funds- based Lending Rate ( MCLR), will be computed based on banks’ marginal cost of borrowing, or incremental cost of funds, rather than the average cost of funds that banks have used so far.
This means, that if a bank’s cost of borrowing is eight per cent now but tomorrow the incremental cost of funds becomes 7.5 per cent, the marginal cost of borrowing for the computation purpose will be 7.5 per cent, rather than the average of the two.
The reason for introducing this system is to force banks to pass on rate benefits to customers. Since January 2015, the central bank has lowered its policy rate by 125 basis points, but banks lowered their lending rates by only about 60 basis points. On the other hand, deposit rates have been slashed by more than 100 basis points, indicating that the incremental cost of funds has actually fallen more than what banks have passed on to their customers.
Bankers said the new norms will soften the blow on balance sheets since old loans would get repriced over period.
Business Standard, New Delhi, 18th Dec.2015

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