"The new guidelines will reduce pressure on the banks' net interest margins (NIMs), a credit positive," Moody's Investors Service said in a statement.

  • As per the guidelines, banks will fix their lending rates as per their marginal cost of funding every month.   
  • Under the current system, banks fix their lending rates based on the average rate of outstanding deposits.

"The new calculation methodology applies only to new loans after April 1, 2016, instead of all existing loans and banks will have a tenor-based benchmark instead of a single base rate," Moody's said.
"Existing loans will continue to be priced off of a base rate until they are repaid or renewed, giving banks ample time to transition to the new methodology without affecting their NIMs," Moody's added.

  • Indian banks currently set their base rates on either their average cost of funds, or marginal cost of funds. 
  • RBI has so far this year lowered policy rates by 1.25 percent while banks have reduced their base rates by much less.   
  • For new loans approved from April, banks will also be allowed to specify interest reset dates, which are linked either to the date of loan approval or the date of MCLR review.


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