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MCLR to be linked with base rate

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MCLR to be linked with base rate
The Reserve Bank of India said on Wednesday that it will link the base rate with the marginal cost of funds based lending rates (MCLR) from April 1 to ensure expeditious transmission of its policy rate to borrowers.The RBI introduced the MCLR system from April 1, 2016, on account of the limitations of the base rate regime.

“With the introduction of the MCLR system, it was expected that the existing base ratelinked credit exposures would also migrate to the former,” the RBI said inastatement on developmental and regulatory policies. A large proportion of bank loans continue to be linked to the base rate despite the RBI highlighting this concern in earlier monetary policy statements.
“Since MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the base rate to the MCLR with effect from April 1,” the RBI said.
RBI Deputy Governor NS Vishwanathan said: “We have been mentioning in earlier policies that we were concerned about the in adequacy of monetary transmission to the base rate andalarge number of accounts still being under the base rate regime
We are now harmonising the calculation of base rate with the MCLR so that the responsiveness of the credit portfolio to monetary policy signals is not hindered by interest rates
I want to clarify that we are not equalising the MCLR with the base rate.” Former RBI governor Raghuram Rajan introduced the MCLR to calculate the benchmark lending rate so that banks passed rate cut benefits to borrowers quickly in a transparent manner.

The Business Standard, New Delhi, 08th February 2018

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