RBI Announces New Methodology to Calculate Base Rate

EMIs on home and auto loans are likely to fall as the Reserve Bank has come
out  with  a new methodology for determining base or minimum lending rates.
Base rate is the minimum rate below which a bank can't lend to customers.

The new methodology will improve efficiency of monetary policy transmission

Banks   will  review  and  publish  the  lending  rate  every  month  on  a and      will  come  into effect from April 1,2016.
The  new methodology would require banks to calculate base rate on marginal cost  of  funds, which will make it easier for lenders to pass rate cuts to  borrowers.

Marginal  cost  of  funds  is  typically  calculated  using the latest rate
payable on current and savings deposits.

pre-announced  date.  Existing  loans  will  continue as it is and existing
borrowers   can  also  move  to  this  new  base  rate  regime,  RBI  said.

Traditionally,  the  base  rate has been calculated on overall (or average)
cost of funds.

The  changes  in  average  rate happen slowly due to longer tenure of fixed
deposits,  making  it difficult for lenders to transmit repo rate reduction
in real time, analysts say.

Since the rate reduction cycle that commenced in January, less than half of the  cumulative  policy  repo  rate  reduction of 125 basis points has been  transmitted by banks,the RBI said yesterday.

The  median  base  lending  rate  has  declined only by 60 basis points, it
added.

Analysts  say  once banks move to the new methodology, further transmission
of  repo rate cuts are likely. As a result, EMIs on home and auto loans are
likely to head lower in coming days, they added.