CONCEPT – EVOLUTION OF R.B.I. RATE REGIME

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CONCEPT – EVOLUTION OF R.B.I. RATE REGIME

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    • Prime Lending Rate (PLR) – 1994: The PLR & the spread were seen to vary widely across banks and bank-groups. Moreover, PLR continued to be rigid and inflexible in relation to the overall direction of interest rates in the economy.
    • Benchmark Prime Lending Rate (BPLR) – 2003: To introduce transparency & ensure appropriate pricing of loans (PLRs truly reflected actual borrowing costs) PLR was converted into a reference benchmark rate. Both PLR and BPLR did not produce adequate monetary transmission to the real economy. This defeated the very purpose for which these benchmarks were introduced.
    • Base Rate - 2010: It included all those elements of the lending rate that are common across all categories of borrowers. Banks were allowed to determine their actual lending rates on loans & advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate. Base Rate was the minimum rate for all loans, banks were not permitted to resort to any lending below the Base Rate. It was to be reviewed at least once in a quarter.
    • Marginal Cost of Funds-based Lending Rate (MCLR) – 2016: Unlike BPLR & base rate, the formula for computing the MCLR was prescribed. MCLR continued to suffer from the same flaw in that transmission to the existing borrowers remained muted as banks adjust, in many cases in an arbitrary manner, the MCLR and/or spread over MCLR.
    • External Benchmark Linked Rate – 2019: Until now, bank were using their own cost of funds to determine the lending rate charged to different categories of borrowers. Now they will need to use an external benchmark to determine the lending rate to be charged. The external benchmark will be along the lines of repo rate / 91-day T-bill yield / 182-day T-bill yield / MIBOR. Banks decide on the spread (difference) they want to build in over & above the external benchmark. Once done, it will arrive at the lending rate. After that, they must keep it fixed for the tenure of the loan unless the credit score of the borrower changes.
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      PT's IAS Academy: CONCEPT – EVOLUTION OF R.B.I. RATE REGIME
      CONCEPT – EVOLUTION OF R.B.I. RATE REGIME
      Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
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