RBI announces new formula for banks to calculate base rate.

The Reserve Bank on Thursday announced a new base rate formula — moving toward marginal cost of funds methodology for interest rate on advances. The final norms on marginal costs for banks will be effective from April 1, 2016. RBI says all 'loans and credit limits from April 1 will be priced with reference to Marginal Cost of Funds based Lending Rate (MCLR). Apart from helping improve the transmission of policy rates into lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances, according to the RBI press release. The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks, RBI says.

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