Page 32 - Banking Finance December 2019

ARTICLE

In July 2010, the Reserve Bank replaced the BPLR system (MCLR) for pricing of loans in the banking system in India
with the base rate system. The actual lending rate was the has not resulted in satisfactory monetary transmission so far.
base rate (for which an indicative formula was also Hence, the Internal Study Group constituted by the Reserve
prescribed) along with the spread. However, the flexibility Bank to review the working of the MCLR system in its report
accorded to banks in the determination of cost of funds - recommended switchover to one of the three external
average, marginal or blended cost - which was a key benchmarks, viz., the treasury bill rate, the CD rate and the
component of base rate calculation - resulted in opacity in Reserve Bank's policy repo rate.
the base rate computed by banks. In particular, the average
cost of funds did not move much with monetary policy Period Change Change in Change in Change
changes due to the term nature of deposits. Moreover, in Policy average weighted in WALR
banks often changed over time the spread over the base rate term average fresh
rate for some borrowers, even without any change in credit Deposit Lending rupee
quality of borrowers, while leaving the base rate unchanged. rate rate o/s loan
Jan 2015 -2.00 -2.11 -1.58 -2.04
Given these deficiencies, the RBI introduced a new lending to Dec
rate system for banks in the form of the marginal cost of 2017
funds based lending rate (MCLR) in April 2016. Unlike the
Jan 2018 0.25 0.31 0.07 0.28
BPLR and the base rate, the formula for computing the
to March
MCLR was prescribed. While some discretion remained with
2019
banks, the MCLR has continued to suffer from the same flaw
in that transmission to the existing borrowers has remained After March 19 Repo rate was reduced twice from 6.25. on
muted as banks adjust, in many cases in an arbitrary manner,
4 April 2019 by 25bps and 6 june 2019 by 25bps and current
the MCLR and/or spread over MCLR, which has kept overall
repo rate is 5.75
lending rates high in spite of the monetary policy being
accommodative since January 2015.
Recommendations of the Internal Study
RBI RATE CUT PATTERN Group
Each of the above mentioned four benchmarks
Date Repo Rate
(PLR,BPLR,Base rate and MCLR) can be considered as
6th Jun 2019 5.75 "internal" in that banks set it themselves or choose at their
4th Aur 2019 6 discretion many of the factors that get into the prescribed
7th Feb 2019 6.25 formulae. The task of the Study Group was to evaluate the
MCLR system and suggest changes in the lending interest
1st Aug 2018 6.5
rate system for improving monetary transmission. The key
6th Jun 2018 6.25
2nd Aug 2017 6
4th Oct 2016 6.25
5th Apr 2016 6.5
29th Sep 2015 6.75
2nd Jun 2015 7.25
4th Mar 2015 7.5
15th Jan 2015 7.75
28th Jan 2014 8

The system of using internal benchmarks such as the base
rate and the marginal cost of funds based lending rate

32 | 2019 | DECEMBER | BANKING FINANCE