Master Direction DBR.Dir.No.85/13.03.00/2015-16
March 03, 2016
Master Direction – Reserve Bank of India (Interest Rate on Advances)
In exercise of the powers conferred by conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the Directions hereinafter specified.
CHAPTER – I
1. Short Title and Commencement.
(a) These Directions shall be called the Reserve Bank of India (Interest Rate on Advances) Directions, 2016.
(b) These directions shall come into effect on the day it is placed on the official website of the Reserve Bank of India.
The provisions of these Directions shall apply to every Scheduled commercial bank (excluding RRBs), licensed to operate in India by Reserve Bank of India. These directions shall not be applicable to operations of foreign branches of Indian banks.
(a) In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them below —
(i) Advance against own deposit means advance granted against Rupee/FCNR(B) term deposit and deposit stands in the name of:
- the borrower, either singly or jointly
- one of the partners of a partnership firm and advance is made to the said firm.
- the proprietor of a proprietary concern and advance is made to such concern.
- a ward whose guardian is competent to borrow on behalf of the ward and where the advance is made to the guardian of the ward in such capacity.
(ii) Benchmark Prime Lending Rate (BPLR) means internal benchmark rate used to determine the interest rates on advances/loans sanctioned upto June 30, 2010.
(iii) Benchmark rate means the reference rate used to determine the interest rates on loans.
(iv) External benchmark rate means the reference rate published by an independent benchmark administrator.
(v) Fixed rate loan means a loan on which the interest rate is fixed for the entire tenor of the loan.
(vi) Floating rate loans means a loan on which interest rate does not remain fixed during the tenor of the loan.
(vii) Internal benchmark rate means a reference rate determined internally by the bank.
(viii) Rests refers to periodicity of charging interest to borrowers.
(ix) Term loan means a loan which is repayable after a specified term period.
(b) All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Banking Regulation Act or the Reserve Bank of India Act, or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be.
CHAPTER – II
4. Interest Rate framework
(a) Scheduled commercial banks shall charge interest on advances on the terms and conditions specified in these directions.
(i) There shall be a comprehensive policy on interest rates on advances duly approved by the Board of Directors or any committee of the Board to which powers have been delegated.
(ii) All categories of advances, except those mentioned in section 13, shall be priced with reference to the benchmark indicated in chapter III.
(iii) Banks shall determine their actual lending rates on advances in all cases by adding the components of spread to the internal benchmark rate. Accordingly, there shall be no lending below the Base Rate or MCLR of a particular maturity, as the case may be, for all loans linked to that benchmark.
(iv) The reference benchmark rate used for pricing the loans shall form part of the terms of the loan contract.
(v) Interest shall be charged on all advances at monthly rests.
Provided that interest on agricultural advances and advance to farmers shall be charged as per the instructions contained in circulars RPCD.No.CPFS.BC. 60/PS.165-85 dated June 06, 1985 and RPCD.No.PLFS.BC.129 /05.02.27/97-98 dated June 29, 1998.
(vi) Banks shall have the freedom to offer all categories of advances on fixed or floating interest rates.
(vii) Interest chargeable on rupee advances shall be rounded off to the nearest rupee.
(viii) Interest charged on small value loans, particularly, personal loans and such other loans of similar nature shall be justifiable having regard to the total cost incurred by the bank in extending the loan and the extent of return that could be reasonably expected from the transaction.
(ix) In case of takeover of bank branches in rural and semi urban centres from one commercial bank to another commercial bank, transfer of borrowal accounts of the existing branch to the branch of acquiring bank shall be on mutually agreed terms of contract.
Provided that the existing borrowers shall not be put into any disadvantage and the option of continuing with the existing bank or the acquiring bank.
(b) The directions contained in section 4(a) above shall also be applicable to Rupee advances granted against FCNR(B) deposits to a third party or out of resources mobilized under the FCNR(B) scheme.
5. Penal Interest
Banks shall formulate a Board approved policy for charging penal interest on advances which shall be fair and transparent. The rate of penal interest shall be decided after taking into account incentive to service the debt and due regard to genuine difficulties of customers.
Provided that no penal interest shall be charged on advances mentioned in the circular RPCD.Plan.BC.15/04.09.01/2001-02 dated August 17, 2001, as amended from time to time.
6. Internal Benchmark
(a) Base Rate
(i) All rupee loans sanctioned and credit limits renewed after July 1, 2010 shall be priced with reference to the Base Rate which will be the internal benchmark for such purposes
(ii) Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers.
(iii) There can be only one Base Rate for each bank.
(iv) Banks shall have the freedom to calculate cost of funds either on the basis of average cost of funds or on marginal cost of funds or any other methodology in vogue, which is reasonable and transparent, subject to it being consistent and made available for supervisory review/scrutiny as and when required.
Provided that where the card rate for deposits of one or more tenor is the basis, the deposits in the chosen tenor/s shall have the largest share in the deposit base of the bank.
(v) Banks shall review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice.
(vi) Banks shall not review the Base Rate methodology for atleast a period of three years from date of its finalization.
Provided that this shall not apply to banks that have commenced their banking operations in India after September 2, 2013. Such banks shall be permitted to revise their Base Rate methodology once within a year from the date of commencement of their business operations in India.
(b) Marginal Cost of Funds based Lending Rate (MCLR)
(i) All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes.
(ii) The MCLR shall comprise of:
- Marginal cost of funds;
- Negative carry on account of CRR;
- Operating costs;
- Tenor premium.
(iii) Marginal Cost of funds
(iv) Negative Carry on CRR
Negative carry on the mandatory CRR which arises due to return on CRR balances being nil, will be calculated as under:
Required CRR x (marginal cost) / (1- CRR)
The marginal cost of funds arrived at (iii) above shall be used for arriving at negative carry on CRR.
(v) Operating Costs
All operating costs associated with providing the loan product including cost of raising funds shall be included under this head. It shall be ensured that the costs of providing those services which are separately recovered by way of service charges do not form part of this component.
(vi) Tenor premium
These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor.
(vii) Since MCLR will be a tenor linked benchmark, banks shall arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of Marginal cost of funds, Negative carry on account of CRR and Operating costs.
(viii) Accordingly, banks shall publish the internal benchmark for the following maturities:
- overnight MCLR,
- one-month MCLR,
- three-month MCLR,
- six month MCLR,
- One year MCLR.
In addition to the above, banks shall have the option of publishing MCLR of any other longer maturity.
(ix) Review of MCLR
(a) Banks shall review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month on a pre-announced date with the approval of the Board or any other committee to which powers have been delegated.
(b) Banks which do not have adequate systems to carry out the review of MCLR on a monthly basis, shall review their rates once a quarter on a pre-announced date for the first one year i.e. upto March 31, 2017.
Provided that, such banks shall adopt the monthly review of MCLR as mentioned in section 6(b)(ix)(a) above.
7. External Benchmark
Banks shall have the freedom to determine the interest rates on the advances linked to market determined external benchmarks.
(a) Banks shall have a Board approved policy delineating the components of spread charged to a customer. The policy shall include principles:
(i) To determine the quantum of each component of spread.
(ii) To determine the range of spread for a given category of borrower / type of loan.
(iii) To delegate powers in respect of loan pricing.
(b) Spread under Base rate system
In addition to the conditions laid down in section 8(a) of these Directions, banks shall adhere to the following conditions:
(i) The credit risk premium charged to an existing borrower shall not be increased except on account of deterioration in the credit risk profile of the customer or change in tenor premium.
Provided that the stipulation contained in sub-section 8(b)(i) above shall not be applicable to loans under consortium / multiple banking arrangements.
(ii) The change in tenor premium on loans sanctioned under Base rate system shall not be borrower specific or loan class specific. In other words, the change in tenor premium shall be uniform for all types of loans for a given residual tenor.
Provided that the spread guidelines mentioned above shall not apply to loans granted under BPLR system, which continue till date. Such loans shall be covered under the terms of the loan agreements.
(c) Spread under MCLR system
In addition to the conditions laid down in section 8(a) of these Directions, banks shall adopt the following broad components of spread:
(i) Business strategy
The component shall be arrived at taking into consideration the business strategy, market competition, embedded options in the loan product, market liquidity of the loan etc.
(ii) Credit risk premium
The credit risk premium charged to the customer representing the default risk arising from loan sanctioned shall be arrived at based on an appropriate credit risk rating/scoring model and after taking into consideration customer relationship, expected losses, collaterals, etc.
(d) The spread charged to an existing borrower shall not be increased except on account of deterioration in the credit risk profile of the customer. Any such decision regarding change in spread on account of change in credit risk profile shall be supported by a full-fledged risk profile review of the customer.
Provided that the stipulation contained in sub-section 8(d) above shall not be applicable to loans under consortium / multiple banking arrangements.
9. Reset of interest rates under MCLR system
(a) Banks shall, at their option specify interest reset dates on their floating rate loans. Banks will have the option to offer loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of review of MCLR.
(b) The Marginal Cost of Funds based Lending Rate (MCLR) prevailing on the day the loan is sanctioned shall be applicable till the next reset date, irrespective of the changes in the benchmark during the interim.
(c) The periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract.
10. Transition to Base Rate from BPLR
Existing loans based on the BPLR system shall run till their maturity.
Provided that existing borrowers desirous of switching to the new Base Rate system, before expiry of the existing contracts shall be given an option on mutually agreed terms.
Provided further that no fee is charged for such switch-over.
11. Transition to MCLR from Base Rate
(a) Banks shall continue to review and publish Base Rate as hitherto.
(b) Existing loans and credit limits linked to the Base Rate shall continue till repayment or renewal, as the case may be.
Provided that existing borrowers shall have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.
Provided that the switch-over shall not be treated as a foreclosure of existing facility.
CHAPTER – V
FOREIGN CURRENCY ADVANCES
12. Interest rates on advances in foreign currency
(a) Banks shall have the freedom to determine the interest rates on advances in foreign currency as per the comprehensive policy on interest rates on advances duly approved by the Board of Directors or any committee of the Board to which powers have been delegated.
(b) The interest rates shall be determined with reference to a market determined external benchmark.
(c) The actual lending rates shall be determined by adding the components of spread to the external benchmark.
CHAPTER – VI
(a) Loans covered by schemes specially formulated by Government of India wherein banks have to charge interest rates as per the scheme shall be exempted from being linked to Base rate/MCLR as the benchmark for determining interest rate.
(b) Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the rectification/restructuring package shall be exempted from being linked to Base rate/MCLR as the benchmark for determining interest rate.
(c) Loans granted under various refinance schemes formulated by Government of India or any Government Undertakings wherein banks charge interest at the rates prescribed under the schemes to the extent refinance is available shall be exempted from being linked to Base rate/MCLR as the benchmark for determining interest rate. Interest rate charged on the part not covered under refinance shall adhere to the Base rate/MCLR guidelines.
(d) The following categories of loans shall be priced without being linked to Base rate/MCLR as the benchmark for determining interest rate:
(i) Advances to banks’ depositors against their own deposits.
(ii) Advances to banks’ own employees including retired employees.
(iii) Advances granted to the Chief Executive Officer / Whole Time Directors.
(iv) Loans linked to a market determined external benchmark.
Provided that floating rate loans based on external benchmark sanctioned before April 01, 2016 shall be equal to or above the Base Rate at the time of sanction or renewal.
(v) Fixed rate loans granted by banks. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion shall not be exempted from MCLR guidelines.
Provided that fixed rate loans sanctioned before April 01, 2016 shall not be below the Base Rate at the time of sanction or renewal.
(see section 6(b) under Chapter III)
|Sl||Source of funds (excluding equity)||Rates offered on deposits on the date of review/ rates at which funds raised|
|Balance outstanding as on the previous day of review as a percentage of total funds (other than equity)|
(1) x (2)
|A||Marginal Cost of Borrowings|
|a||Current Deposits||The core portion of current deposits identified based on the guidelines on Asset Liability Management issued vide circular dated October 24, 2007 should be reckoned for arriving at the balance outstanding.|
|b||Savings Deposits||The core portion of savings deposits identified based on the guidelines on Asset Liability Management issued vide circular dated October 24, 2007 should be reckoned for arriving at the balance outstanding.|
|c||Term deposits (Fixed Rate)||Term deposits of various maturities including those on which differential interest rates are payable should be included.|
|d||Term deposits (Floating Rate)||The rate should be arrived at based on the prevailing external benchmark rate on the date of review.|
|e||Foreign currency deposits||Foreign currency deposits, to the extent deployed for lending in rupees, should be included in computing marginal cost of funds. The swap cost and hedge cost of such deposits should be reckoned for computing marginal cost.|
|a||Short term Rupee Borrowings||Interest payable on each type of short term borrowing will be arrived at using the average rates at which such short term borrowings were raised in the last one month. For eg. Interest on borrowings from RBI under LAF will be the average interest rate at which a bank has borrowed from RBI under LAF during the last one month.|
|b||Long term Rupee Borrowings||Option 1:|
Interest payable on each type of long term borrowing will be arrived at using the average rates at which such long term borrowings were raised.
The appropriate benchmark yield for bank bonds published by FIMMDA for valuation purposes will be used as the proxy rate for calculating marginal cost.
|c||Foreign Currency Borrowings including HO borrowings by foreign banks (other than those forming part of Tier-I capital)||Foreign currency borrowings, to the extent deployed for lending in rupees, should be included in computing marginal cost of funds. The all-in-cost of raising foreign currency borrowings including swap cost and hedge cost would be reckoned for computing marginal cost of funds.|
|Marginal cost of borrowings||The marginal cost of borrowings shall have a weightage of 92% of Marginal Cost of Funds while return on networth will have the balance weightage of 8%.|
|B||Return on networth|
Amount of common equity Tier 1 capital required to be maintained for Risk Weighted Assets as per extant capital adequacy norms shall be included for computing marginal cost of funds. Since currently, the common equity Tier 1 capital is (5.5% +2.5%) 8% of RWA, the weightage given for this component in the marginal cost of funds will be 8%.
In case of newly set up banks (either domestic or foreign banks operating as branches in India) where lending operations are mainly financed by capital, the weightage for this component may be higher ie in proportion to the extent of capital deployed for lending. This dispensation will be available for a period of three years from the date of commencing operations.
The cost of equity will be the minimum desired rate of return on equity computed as a mark-up over the risk free rate. Banks could follow any pricing model such as Capital Asset Pricing Model (CAPM) to arrive at the cost of capital. This rate can be reviewed annually.
|Marginal cost of funds = 92% x Marginal cost of borrowings + 8% x Return on networth|
CHAPTER – VII
REPEAL AND OTHER PROVISIONS
14. With the issue of these directions, the instructions / guidelines contained in the following circulars issued by the Reserve Bank stand repealed:
|1||DBOD.No.Dir.BC.36/C.347-90||22.10.1990||Rounding off Transactions to the Nearest Rupee|
|2||DBOD.No.Dir.BC.115/13.07.01/ 94||17.10.1994||Interest Rates on Advances|
|3||IECD.No.28/08.12.01/94-95**||22.11.1994||Compliance with Lending Discipline – (a) Charging of Uniform Rates of Interest for Lending under Consortium Arrangement and (b) Penal Interest for Non-compliance with the Discipline|
|4||DBOD.No.Dir.BC.141/13.07.01-94||07.12.1994||Interest Rates on Advances|
|5||DBOD.No.Dir.BC.89/13:07:01/95||21.08.1995||Deregulation of Lending Rates – Levy of Interest Tax|
|6||DBOD.No.BC.99/13.07.01/95||12.09.1995||Withdrawals against Uncleared Effects|
|7||DBOD.No.Dir.BC.139/13.07.01/96||19.10.1996||Interest Rates on Advances – Prime Lending Rate|
|8||DBOD.No.Dir.BC.10/13.07.01/97||12.02.1997||Interest Rates on Advances – Prime Lending Rate|
|9||DBOD.No.Dir.BC.124/13.07.01/97-98||21.10.1997||Interest Rates on Advances|
|10||DBOD.No. Dir.BC.33/13.03.00/98||29.04.1998||Interest Rates on Advances|
|11||DBOD.No.Dir.BC.36/13.03.00/98||29.04.1998||Monetary and Credit Policy Measures|
|12||DBOD.No.BP.BC.35/21.01.002/99||24.04.1999||Monetary and Credit Policy Measures|
|13||DBOD.No.Dir.BC.100/13.07.01/ 99||11.10.1999||Interest Rates on Advances – Fixed Rate Loans|
|14||DBOD.No.Dir.BC.106/13.03.00/99||29.10.1999||Interest Rates on Advances|
|15||DBOD.No.Dir.BC.114/13.03.00/99||29.10.1999||Mid-Term Review of Monetary and Credit Policy 1999-2000|
|16||DBOD.No.Dir.BC.168/13:03:00-2000||27.04.2000||Monetary and Credit Policy for the Year 2000-2001 – Interest Rate Policy|
|17||DBOD.No.BC.178/13:07:01/2000||25.05.2000||Interest Rates on Advances|
|18||DBOD No. BP.BC 31/21.04.048/00-01||10.10.2000||Monetary and Credit Policy Measures – Mid-Term Review for the Year 2000-2001|
|19||IECD No.9/04.02.01/2000-01||05.01.2001||Interest Rate on Export Credit|
|20||DBOD No.Dir.BC 106/13.03.00/2000-01||19.04.2001||Interest Rates on Advances|
|21||DBOD No.Dir.BC 107/13.03.00/2000-01||19.04.2001||Monetary and Credit Policy for the year 2001-2002 – Interest Rate Policy|
|22||IECD No.13/04.02.01/2000-01||19.04.2001||Rupee Export Credit Interest Rates|
|23||DBOD No.Dir.BC.117/13.07.01/2000-01||04.05.2001||Charging of Penal Interest|
|24||DBOD No.Dir.BC.75/13.07.01/2002||15.03.2002||Interest Rates on Advances|
|25||DBOD No.Dir.BC.8/13.07.00/2002-03||26.07.2002||Charging of Interest at Monthly Rests – Consolidated Instructions|
|26||DBOD.No.Dir.BC.19/13.07.01/2002-03||19.08.2002||Zero percent Interest Finance Schemes for Consumer Durables|
|27||DBOD.No.Dir.BC.25/13.03.00/2002-03||19.09.2002||Charging of Interest at Monthly Rests – Agricultural Advances|
|28||IECD.No.18/04.02.01/2002-03||30.04.2003||Rupee Export Credit Interest Rates|
|29||DBOD.No.BC.103/13.07.01/2003||30.04.2003||Interest Rates on Advances|
|30||DBOD.No.Dir.BC.103A/13.03.00/2002-03||30.04.2003||Interest Rates on Advances – Prime Lending Rate and Spreads|
|31||DBOD.No.Dir.BC.10/13.03.00/2003-04||14.08.2003||Interest Rates on Advances|
|32||DBOD.No.Dir.BC.38/13.03.00/2003-04||21.10.2003||Interest Rates on Advances – Prime Lending Rate and Spreads|
|33||DBOD.No.Dir.BC.39/13.03.00/2003-04||21.10.2003||Interest Rates on Advances – Prime Lending Rate and Spreads|
|34||DBOD.No.81/13.07.01/2003-04||24.04.2004||Interest Rates on Advances|
|35||IECD.No.10/04.02.01/2003-04||24.04.2004||Rupee Export Credit Interest Rates|
|36||IECD.No.13/04.02.01/2003-04||18.05.2004||Export Credit Interest Rates for Gold Card Holder Exporters|
|37||DBOD.No.BC.85/13.07.01/2003-04||18.05.2004||Interest Rates on Advances|
|38||DBOD.No.BC.84/13.07.01/2004-05||29.04.2005||Interest Rates on Advances|
|39||DBOD.Dir (Exp.).BC.No.83/ 04.02.01 /2005-06||28.04.2006||Rupee Export Credit Interest Rates|
|40||DBOD.Dir (Exp.).BC.No.79/04.02.01/ 2006-07||17.04.2007||Interest Rates on Advances|
|41||DBOD.Dir.BC.93/13.03.00/2006-07||07.05.2007||Complaints about Excessive Interest Charged by Banks|
|42||DBOD.Dir.(Exp).BC.No.77/04.02.01/2007-08||28.04.2008||Rupee Export Credit Interest Rates|
|43||DBOD.Dir.(Exp).BC.No.131/04.02.01/2008-09||29.04.2009||Rupee Export Credit Interest Rates|
|44||DBOD.Dir.BC.88/13.03.00/2009-10||09.04.2010||Guidelines on Base Rate|
|45||DBOD.Dir.(Exp).BC.No.102/04.02.01/2009-10||06.05.2010||Rupee Export Credit Interest Rates|
|46||Mail Box clarification||14.05.2010||Guidelines on Base Rate|
|47||Letter to IBA||24.06.2010||Guidelines on Base Rate|
|48||Mail Box clarification||24.09.2010||Guidelines on Base Rate|
|49||DBOD.No.Dir.BC.73/13.03.00/2010-11||06.01.2011||Guidelines on Base Rate|
|50||DBOD.No.Dir.BC.81/13.03.00/2010-11||21.02.2011||Guidelines on Base Rate|
|51||DBOD.Dir.BC.34/13.03.00/2011-12||09.09.2011||Guidelines on Base Rate|
|52||DBOD.Dir.No.12740/13.07.01/2011-12||24.2.2012||Guidelines on Base Rate|
|53||Mail Box clarification||10.04.2012||Guidelines on Base Rate|
|54||Mail Box clarification||27.04.2012||Guidelines on Base Rate|
|55||Mail Box Clarification||31.12.2012||Guidelines on Base Rate|
|56||DBOD.Dir.BC.No.47/13.03.00/2013-14||02.09.2013||Base Rate- Revised Guidelines|
|57||DBOD.Dir.BC. No.106/13.03.00/2013-14||15.04.2014||Differential Rate of Interest for Micro and Small Enterprises (MSEs)|
|58||Mail Box Clarification||19.08.2014||Guidelines on Base Rate|
|59||Mail Box Clarification||08.10.2014||Base Rate Guidelines|
|60||DBR.Dir.BC.No.63/13.03.00/2014-15||19.01.2015||Interest Rates on Advances|
|61||DBR.No.Dir.BC.67/13.03.00/2015-16||17.12.2015||Interest Rates on Advances|
|** Paragraph (d) of the circular listed at Sr. No. 3 above shall be treated as repealed.|
15. All approvals / acknowledgements given under the above circulars shall be deemed as given under these directions.
16. Loan contracts entered into by banks based on the guidelines (including BPLR guidelines) contained in the above circulars prior to issue of these Directions shall be deemed as covered under these Directions.