The Reserve Bank of India (RBI) has proposed a new methodology for calculating banks’ Marginal Cost of Funds Based Lending Rate (MCLR), using a three-month moving average of the marginal cost of domestic deposits and borrowings.
Under the proposed framework, banks would calculate the marginal cost component using funding costs recorded over the preceding three months rather than relying on a single point-in-time assessment. The methodology would use annualised weighted-average interest costs based on the volume of new deposits and borrowings in each month.
The RBI has proposed that the underlying data used for the calculation should be system-generated and independently verifiable. The move is aimed at improving consistency in how banks determine their marginal funding costs and reducing variations in the calculation process.
The proposed MCLR changes form part of a wider draft framework covering interest-rate setting for fixed and floating-rate loans, benchmark-linked lending, spreads and rate resets.
For floating-rate loans, the RBI has proposed linking lending rates to an internal or external benchmark along with a risk-based spread. For most such loans, the benchmark reset period would be capped at three months, with the selected reset frequency generally remaining unchanged throughout the loan tenure.
The proposed framework also seeks to bring greater discipline to lending spreads. These would comprise a credit risk premium along with components such as operating costs, term premium and business strategy premium. While these components may be positive or zero, the credit risk premium would have to remain positive.
The RBI has further proposed that the credit risk premium should be revised only when there is a change in the borrower’s credit profile, subject to the lender’s policy and the terms of the loan agreement.
The new framework is proposed to come into effect from April 1, 2027, subject to finalisation after stakeholder feedback. Existing loans linked to internal or external benchmarks would be migrated to the prescribed framework through a one-time mapping exercise by April 1, 2029.
The proposed changes are intended to make lending rates more transparent and consistent across banks while providing borrowers with greater clarity on how their loan rates are determined and reset.
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