The revised rates will come into effect on Saturday. Under the MCLR regime, banks review their lending rates every month based on their incremental cost of funds and a few other factors, as mandated by the Reserve Bank of India (RBI). This method of determining lending rates replaced the older base-rate regime in April 2016.

In its August and October monetary policy meetings, the central bank flagged the issue of poor transmission through MCLRs as nearly half the loans in the system continue to remain pegged to the base rate. On Wednesday, the RBI published the report of an internal study group which recommended the use of three external benchmarks – the T-Bill rate, the certificate of deposit (CD) rate and the repo rate – for determining interest rates.

The report also recommended that loans come up for interest-rate reset every quarter, replacing the existing convention of annualised resets. “After the adoption of an external benchmark from April 1, 2018 as recommended by the study group, banks may be advised to migrate all existing benchmark prime lending rate (BPLR)/base rate/MCLR borrowers to the new benchmark without any conversion fee or any other charges for switchover on mutually agreed terms within one year from the introduction of the external benchmark, i.e., by end-March 2019,” it stated.

According to the report, private-sector banks took almost six months for the transmission from the lower MCLR to actual lending rates, while in the case of public-sector banks, the transmission was not complete even after a six-month period.