Apart from helping borrowers reap the benefit of lower rates, the step will also improve transparency in the methodology followed by banks for determining interest rates on advances.

The Reserve Bank said: "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''.

Many banks currently follow average cost of funds or 'blended cost of funds (liabilities) method' for calculating the base rate, while a few already take into account the proposed measure of 'marginal cost of funds'.

RBI said the MCLR will be a tenor linked internal benchmark and actual lending rates will be determined by adding the components of spread to the MCLR.

"The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period," the RBI said.

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