Master Direction – Reserve Bank of India (Interest Rate on Advances) Directions, 2016
This Master Direction outlines the guidelines for interest rates on advances by banks.
Applicability: These directions apply to all commercial banks, including regional rural banks, local area banks, and small finance banks.
Interest Rate Framework: Banks are required to adopt a transparent and fair interest rate framework, ensuring that the interest rates charged to borrowers are reasonable and transparent.
Benchmark Rates: Banks can adopt either an internal benchmark or an external benchmark for determining interest rates.
Internal Benchmark: Banks can use the Base Rate or the Marginal Cost of Funds based Lending Rate (MCLR) as their internal benchmark.
External Benchmark: Banks can use an external benchmark, such as the repo rate, to determine interest rates.
Interest Rates on Advances: Banks are required to set interest rates on advances based on the benchmark rate, with a spread that is reasonable and transparent.
Reset of Interest Rates: Banks are required to reset interest rates on advances periodically, based on changes to the benchmark rate.
Transition: Banks are required to transition from the Base Rate to the MCLR system, and from the BPLR (Benchmark Prime Lending Rate) to the Base Rate.
These directions aim to promote transparency, fairness, and competition in the lending market, and to protect the interests of borrowers.
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