RBI Guidelines on MCLR 2018

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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.
A home loan interest rate is calculated by MCLR (or Base Rate) + Spread. Let’s say the MCLR is 9% then the interest rate will be 9%+ 0.25%( spread) = 9.25%. It was seen that banks would initially provide a low spread rate to attract the customers and after some time the spread is increased which directly affects the customers. After implementation of MCLR banks are not allowed to change the spread unless there is a change in customer’s credit. Under the MCLR process, banks have to publish their MCLR rate at least five times in a month. The declaration should be done overnight, one month, three months, six months, one year, two years, and three years rates each month. However, when it comes to lending on an MCLR basis, the interest rate of the home loan gets re-priced on a periodical basis. Now <strong>RBI</strong> has made it necessary to allow base rate borrowers to switch to MCLR. One can switch to MCLR with the same lender or the other option is to go for a refinance. With a refinance, a borrower can switch to the lender who is providing loans at MCLR. Switching from lender to lender or changing the mode of interest can be a chargeable one. Banks may impose transfer charges to a borrower while applying for a transfer. So if one’s home loan is near to end or only a few installments are remaining then one can still continue to be in base rate itself.
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RBI Guidelines on MCLR 2018

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