RBI Announces New Methodology to Calculate Base Rate

EMIs on home and auto loans are likely to fall as the Reserve Bank has come out with a new methodology for determining base or minimum lending rates. Base rate is the minimum rate below which a bank can’t lend to customers.

The new methodology will improve efficiency of monetary policy transmission and will come into effect from April 1,2016.

The new methodology would require banks to calculate base rate on marginal cost of funds, which will make it easier for lenders to pass rate cuts to borrowers. Marginal cost of funds is typically calculated using the latest rate payable on current and savings deposits.

Banks will review and publish the lending rate every month on a pre-announced date. Existing loans will continue as it is and existing borrowers can also move to this new base rate regime, RBI said.

Traditionally, the base rate has been calculated on overall (or average) cost of funds. The changes in average rate happen slowly due to longer tenure of fixed deposits, making it difficult for lenders to transmit repo rate reduction in real time, analysts say.

Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks, the RBI said on Tuesday.

The median base lending rate has declined only by 60 basis points, it added.

Analysts say once banks move to the new methodology, further transmission of repo rate cuts are likely. As a result, EMIs on home and auto loans are likely to head lower in coming days, they added.

The RBI held repo rate or the rate at which it lends short-term money to banks at 6.75 per cent on Tuesday.

[Source:- NDTV]

By Adam