The recent monetary policy has brought good news for those who had taken home loans before April'16.
They will now get the benefits of the lower marginal cost of lending rate (MCLR), which the RBI has mandated banks to use.
It had asked banks in April'16 to replace the base rate with the MCLR, but banks had continued using the older benchmark.
What is MCLR?
Marginal cost based lending rate is an interest rate formula used by banks to set their interest rates for different loans.
Banks obtain funds for lending from deposits by customers and by borrowing from the RBI.
Under MCLR, banks will set interest rates on loans based on interest rates given for deposits and the repo rate (the rate at which bank borrows from RBI).
What are the advantages of MCLR?
The RBI introduced the MCLR in April'16 due to limitations of the base rate system. It is efficient as pricing of loans is directly linked to cost of funds. The interest rate here is lower compared to that on base rates.
RBI to issue necessary directives next week
However, the RBI noted that "a large proportion of bank loans continue to be linked to the Base Rate despite RBI highlighting this concern in earlier statements."
With its latest directive, borrowers will directly move to the MCLR system without any action on their part.
The bank will issue necessary guidelines in this regard by the end of next week, it said.