Last Updated : Feb 08, 2018 02:43 PM IST | Source:

Linking Base Rate and MCLR: How it will impact your loan EMI and what you should do

The MCLR regime was introduced by the RBI in April 2016 for better transmission of policy rate reductions to bank customers.

Sarbajeet Sen

In its credit policy review on Wednesday, the Reserve Bank of India said that it would soon come out with norms to harmonise the Marginal Cost of funds Lending Rate (MCLR) with the Base Rate methodology for determining lending rates.

“With the introduction of the MCLR system, it was expected that the existing Base Rate linked credit exposures shall also migrate to MCLR system. It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate despite the Reserve Bank highlighting this concern in earlier monetary policy statements,” the RBI said in its Monetary Policy statement. It said that Base Rate and MCLR will be linked with effect from April 1, 2018.

However, what does it mean for borrowers? Leading experts on the subject feel that the decision to harmonise the two systems would hugely beneficial for borrowers under the Base Rate system.

“On the face of it, harmonising the rates to MCLR would mean that the base rate would vary in tandem with the MCLR. This has the potential to bring substantial savings to the borrower. Currently, on an average, there is a difference of almost 70 basis points between the base rate and the MCLR interest rates” Adhil Shetty, CEO, told Moneycontrol.

He pointed out that with the almost 70 basis points difference between the base rate scheme and MCLR, closing of this gap can be very significant. “For instance, for a loan of Rs.50 lakh taken 4 years back and having a tenor of 20 years, a 70bps reduction would mean savings of more than Rs 3.6 lakhs,” he says.

This is how it may work for you:


Shetty says once the systems are harmonised, base rate borrowers can decided to shift to MCLR. “The exact nature of harmonization is still not clear, but we can expect relief for borrowers who are on the base rate. Even if that is not the case, borrowers on base rate can consider switching to MCLR-based lending with the same bank or else transfer, i.e., get the loan refinanced from another bank on MCLR mode. If you are in the base rate, a move to the MCLR can bring down interest rates. However, one may also continue the loan on base rate, especially if the loan term is nearing the end.

The MCLR scheme was introduced by the RBI with a view to improve the transmission of policy rate reductions to the customers. Though the new loans issued post-April 2016 were based on this, the earlier loans continued to be on the older Base Rate system.

Naveen Kukreja, CEO & Co-founder, said linking the Base Rate to MCLR will ensure better transmission of policy rate changes to base-rate borrowers.  “Borrowers under the base rate system should welcome the RBI proposal as lending rates under the base-rate system is always higher than MCLR. With the implementation of the proposal, base-rate borrowers will benefit from the advantages of MCLR regime, without having to pay any switching fee,” Kukreja said.

However, borrowers should wait for RBI's detailed guidelines on the issue before taking a call.

Under the Base Rate system introduced in July 2010, lenders were not permitted to lend below a certain threshold, to ensure that change in interest rate was effectively transmitted to customers. However, subsequently when it was felt that the policy change transmission from bank to customer was not being effect the RBI decided to bring in the MCLR regime in April 2016. The MCLR system is linked to actual cost of funds of banks.
First Published on Feb 8, 2018 12:49 pm
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