RBI Guidelines on MCLR 2018

Recent announcement made on MCLR
The latest announcement on MCLR which has become a burning topic among the
financial experts, as well as the home loan borrowers, is the <strong>RBI</strong>s announcement of
linking all existing base rate home loans to MCLR with effect from 1st April 2018.
It means that after two years of introducing MCLR, now it has become mandatory.
The announcement was made on Wednesday ( 7th Feb 2018) and the objective of
this change is to improve monetary policy transmission. The deputy governor of
the <strong>RBI</strong> N S Vishwanathan reported that the base rate and the MCLR will be
“harmonized and not equalized”.
A base rate on a home loan is reviewed quarterly whereas an MCLR is reviewed
monthly. Both of these two rates have different ways of fixing it. Once the linking
of the base rate and MCLR is done, it is likely that base rate will be reviewed on a
monthly basis as well.
The interest rate on a credit was previously determined by the base rate. If there is
a rate increase by <strong>RBI</strong> then bank used to increase the interest rate promptly, but
when the rate of <strong>RBI</strong> falls down banks slow down the process of bringing the
interest rate down.
In the January 2017, the MCLR of almost all the banks were reduced by 80-90
basis points because of a low repo rate. A basis point is a one-hundredth of one
percentage point. But the base rate remained unchanged for many banks. It directly
meant that banks were getting fund from <strong>RBI</strong> at a low cost but the same money
was disbursed to the general public at a high cost. Bank earned a high benefit in an
unjustified manner. But the application of MCLR ensures that the banks regularly
revise the interest rate along with any change in <strong>RBI</strong> rates. So the ultimate
beneficiary by implementing MCLR is the borrower himself.