Mumbai: The Reserve Bank of India (RBI) on Tuesday clarified that fixed rate loans of up to three years will have to be linked to Marginal Cost of Funds based Lending Rate (MCLR) for determining interest rate. RBI had a direction in December 2015 asking banks to use marginal rate as a benchmark for fixing lending rates as the lenders were not passing on the repo rate cuts to borrowers.
Previously, all fixed rate loans had been exempted from being set on the basis of marginal rate. But now only such exemption is available only to the loans with a repayment period of over three years. According to analysts, it is a negative development for banks as short-term loans such as working capital loans and personal loans will have to be fixed on the basis of marginal rate.
According to Religare Capital Markets analyst Parag Jariwala, the RBI’s decision would hurt the margins of the banks, which are already reeling under bad debts.
“Our interaction with bankers suggests that banks were thinking of using the fixed rate loan approach to price working capital loans in order to avoid the margin impact. But with most the working capital loans now be linked to the marginal cost of funding, this will affect margins in a downward interest-rate environment,” the brokerage said in its note.
Going into the details of the interest rate calculation, RBI said that for computing MCLR the balances of deposits and other borrowings outstanding as on the previous day of the review will be considered. However, it banks can use the outstanding deposits and other borrowings as on any day, not more than seven calendar days, prior to the date from which the MCLR becomes effective.
