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: The internal benchmark can be either the Base Rate or the Marginal Cost of Funds based Lending Rate (MCLR).
External Benchmark: The external benchmark can be any benchmark published by the Financial Benchmarks India Pvt. Ltd. (FBIL).
Interest Rates on Advances: The interest rates on advances shall be determined by adding a spread to the benchmark rate.
Reset of Interest Rates: The interest rates shall be reset at least once a quarter in case of MCLR and at least once a month in case of external benchmarks.
Transition: Banks are required to transition from the Base Rate to the MCLR system and from the Benchmark Prime Lending Rate (BPLR) to the Base Rate.
These directions aim to ensure transparency, fairness, and reasonableness in the determination of interest rates by banks.
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