Announcing this, the RBI said that the internal committee report on lending rates has suggested that pricing of lending rates should be switched to external benchmark in a time bound manner. The move is aimed to improve transmission of policy rates.
As of now, banks decide on lending rates based on a formula given by the Reserve Bank of India. Since 2016, banks have adopted marginal cost of lending rate (MCLR) formula where rates are linked to cost of their funds and are reset in different intervals such as one month, six months to one year.
The RBI had set up an internal committee headed by Dr Janak Raj to study various aspects of the MCLR system from the perspective of improving monetary transmission.
Speaking to media, Viral Acharya, deputy governor said move to link rate to external benchmark is in line with international market and it will give fair bit of transparency for borrowers.
“The report has said that three possible external benchmark that lending could be tied to and the report suggest quarterly reset so that transmission happens soon.”
The RBI statement said, “Arbitrariness in calculating the base rate and MCLR and spreads charged over them has undermined the integrity of the interest rate setting process. The base rate and MCLR regime is also not in sync with global practices on pricing of bank loans.”
The RBI will take a final view on these recommendations based on feedback received until October 25, 2017.