Reserve Bank of India mandate to link lending rate to one external benchmark There has been an immediate increase in the interest rate paid by borrowers, making it the most effective transmission tool ever, while the previous marginal cost of the lending rate (MCLR) governance was less satisfactory than previous ones such as the base rate and the benchmark prime lending rate, a research paper by reserve Bank of India Told.

In a bank-dependent economy, efficient monetary policy transmission to banks’ lending rates becomes the most important instrument for the successful implementation of monetary policy. reserve Bank of India The lending rate benchmark has changed over time since the regulation of lending rates in October 1994.

“The transmission during the MCLR regime was far from satisfactory,” said the RBI research paper, introducing external benchmark-based pricing of personal loans and loans to micro and small enterprises, with effect from October 1, 2019, and For medium enterprises from April. 1, 2020.

Effective transmission requires fulfillment of various pre-conditions such as transparency in the process of pricing of loans by banks. Since October 1994, when the RBI regulated interest rates, the banking regulator has also been talking about adopting a specific benchmark for pricing of loans by banks.

The RBI made an internal benchmark – the prime lending rate (PLR) – mandatory in October 1994. In April 2003, the central bank replaced the PLR ​​with the benchmark PLR (BPLR), followed by the base rate in July 2010 and the MCLR in April 2016. ,

“None of these benchmarks lived up to expectations,” said the paper, authored by Sadhan Kumar Chattopadhyay and Arghya Kusum Mitra.

In April 2004 and July 2019, monetary transmission was subject to variable lag in internal benchmark regimes and policy cycles. “The transmission in loan rates was usually – though not always – higher during the tight cycle than during the easy cycle,” he said.

Transmission was muted during the MCLR regime during April-October 2016 but post-demonetisation, aided by a liquidity glut, which allowed domestic banks to reduce their savings deposit rates for the first time since the deregulation of savings deposit rates in October 2011. encouraged to do.

The low cost of funds prompted banks to sharply reduce their MCLR. “The performance of the MCLR regime on transmission was not very satisfactory, far from the impact of outright demonetisation on the cost of funds,” the paper said.