19. BASE RATE, MCLR, EBR Flashcards
What is the Base Rate?
The minimum interest rate below which Scheduled Commercial Banks cannot lend, introduced in July 2010.
What did Base Rate replace?
It replaced the Benchmark Prime Lending Rate (BPLR) system.
What factors determine the Base Rate?
Average cost of deposits, CRR & SLR cost, operational costs, and return on net worth.
What is the limitation of the Base Rate system?
It led to slow monetary policy transmission as it was based on historical deposit costs.
What is MCLR?
Marginal Cost of Funds-based Lending Rate, introduced in April 2016 for faster policy transmission.
Why was MCLR introduced?
To improve interest rate transparency and ensure better monetary policy transmission.
What are the components of MCLR?
Marginal cost of deposits, CRR & SLR cost, operational costs, and tenor premium.
How often do banks review their MCLR?
Every month.
What is the difference between Base Rate and MCLR?
MCLR is based on the marginal cost of funds, whereas Base Rate considers the average cost.
Why did MCLR fail to ensure effective policy transmission?
Banks delayed reducing lending rates fearing deposit losses and competition from small savings schemes.
What is the External Benchmark Rate (EBR)?
A lending rate linked to an external financial benchmark instead of internal calculations.
When did RBI mandate EBR for loans?
October 1, 2019.
Which loans must follow EBR?
New floating-rate retail loans, personal loans, and MSME loans.
What are the four external benchmarks banks can use?
Repo rate, 3-month Treasury bill yield, 6-month Treasury bill yield, or a benchmark set by FBIL.
Why did RBI introduce EBR?
To ensure faster and more transparent transmission of repo rate changes to lending rates.
How frequently must banks reset interest rates under EBR?
At least once every three months.
How does EBR benefit borrowers?
Interest rate changes affect borrowers immediately, making loans more responsive to RBI policy.
What is the Spread in loan pricing under EBR?
The extra percentage added to the benchmark rate to cover credit risk, operational costs, and business strategy.
Can banks change the credit risk premium in the spread?
Yes, but only if the borrower’s creditworthiness changes significantly.
What impact does EBR have on banks?
Banks face reduced profit margins as they cannot delay rate reductions.
What happens if RBI raises the repo rate under EBR?
Lending rates increase immediately, making loans costlier.
Why do NBFCs not follow EBR?
RBI has not mandated NBFCs to adopt an external benchmark for lending.
How does EBR impact monetary policy effectiveness?
It ensures faster transmission of rate cuts and hikes to borrowers.
What ensures fairness in EBR loan pricing?
RBI allows banks to change operational costs only once every three years.
What was the key issue with Base Rate and MCLR?
They led to a delayed response in monetary policy transmission.
How do small savings schemes impact rate transmission?
Higher small savings rates discourage banks from lowering deposit rates, slowing lending rate cuts.
Can banks use different external benchmarks for different loan categories?
No, a bank must adopt a single benchmark per loan category.
What is the Call Money Rate, and how does it relate to EBR?
It is the short-term interest rate banks charge each other, which adjusts with repo rate changes and influences EBR.
How do deposit rates affect lending rates?
Higher deposit rates make it difficult for banks to lower lending rates, reducing monetary policy effectiveness.
What is the future of interest rate frameworks in India?
Continued movement towards external benchmarking to ensure faster and more effective monetary policy transmission.
