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Master Direction - Reserve Bank of India (Interest Rate on Advances) Directions 2016

FEMA - DBR.Dir.No.85/13.03.00/2015-16 - Dated:- 3-3-2016 - RBI/DBR/2015-16/20 Master Direction DBR.Dir.No.85/13.03.00/2015-16 March 03, 2016 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 PRELIMINARY 1. Short Title and Commencement. (a) These Directions shall be .....

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ions, 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 an .....

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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 B .....

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owers 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 .....

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(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 .....

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terest 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. CHAPTER - III BENCHMARK 6. Internal Benchmar .....

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nds 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 ( .....

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e 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 The marginal cost of funds shall comprise of Marginal cost of borrowings and return on networth. The detailed methodology for computing mar .....

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red 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 .....

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unds 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. .....

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te 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 consor .....

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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 .....

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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 sanctione .....

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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 t .....

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rket determined external benchmark. (c) The actual lending rates shall be determined by adding the components of spread to the external benchmark. CHAPTER - VI EXEMPTIONS 13. Exemptions The following types of loans shall be exempted from the provisions contained under chapter III and IV of this directive: (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 t .....

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lable 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 .....

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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. Annex (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 (1) Balance outstanding as on the previous day of review as a percentage of total funds (other than equity) (2) Marginal cost (1) x (2) Remarks A Marginal Cost of Borrowings 1 Deposits a Current D .....

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ies 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. 2 Borrowings a Short term R .....

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m borrowings were raised. Option 2: 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 inclu .....

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uity 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 .....

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ssued by the Reserve Bank stand repealed: SL Circular No. Date Subject 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 Int .....

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nterest 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 Mo .....

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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.D .....

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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.84/13.07.01/200 .....

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