MCLR method to replace Base Rate for all retail loans from April 1 , 2016
MCLR method to replace Base Rate for all retail loans from April 1 , 2016
From April 1st onwards, the lending rate calculation will change for home, auto or any other floating rate retail loan. The lending rate will now be linked to the Marginal Cost of Funds based Lending Rate (MCLR) instead of the Base Rate. Existing borrowers have the option of continuing with Base Rate or switch to MCLR. Simultaneously, all new borrowers will be offered MCLR with immediate effect.
MCLR method will see banks changing their lending rates more frequently than the base rate since the same would be calculated as per marginal cost of funds. Accordingly, the banks will have to review MCLR on a monthly basis and bring necessary changes, if required, at least every quarter. The changing frequency of lending rates reset will have to be informed to the customers at the time of borrowing the loan.
Discussing the potential changes that will be brought about by the new method, Rajiv Anand, Head Retail Banking, Axis Bank says, “There will be no change for existing borrowers unless they want to shift to the new MCLR rate. But for new borrowers the MCLR linked rate will apply from April 1. Existing borrowers have the option to shift to the new MCLR linked rate at no extra charge. But it will be more volatile and hence, they must evaluate whether it makes sense to continue with the existing Base Rate or shift.
In the current economic scenario, of falling interest rates, it seems a sensible idea to shift to the MCLR linked rate. As the new rates change more frequently and will be more market sensitive, any change in deposit rate will also lead to change in lending rates.
Under the MCLR method, borrowers, especially ones with long-term home loans, will witness their loan tenure being reset on a regular basis due to changing rates. However, it looks unlikely that Banks will change the monthly EMIs as that would need them to get a mandate from customer to change the deduction on every rate change.
