Reserve Bank of India (RBI) has issued guidelines on computing interest rates on advances based on the Marginal Cost of Funds based Lending Rate (MCLR) to banks vide circular DBR No. Dir.BC.67/13.03.00/2015-16 dated December 17, 2015 which will be effective from April 1, 2016. Apart from helping improve the transmission of policy rates into the lending rates of banks, these guidelines are expected to improve transparency in the methodology followed by banks for determining interest rates on advances. These guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks. Further, marginal cost of pricing of loans will help the banks to become more competitive and enhance their long run value and contribution to economic growth.

This was stated by Shri Jayant Sinha, Minister of State in the Ministry of Finance in written reply to a question in Lok Sabha.

Marginal Cost of Funds based Lending Rate guidance improves transmission of policy rates and transparency in bank lending. Implementation of a Marginal Cost of Funds based Lending Rate (MCLR) framework requires banks to compute and set interest rates on advances using marginal cost principles, with the methodology prescribed by the central banking authority. The framework aims to strengthen the transmission of policy rates into bank lending rates by linking loan pricing more directly to banks' marginal funding costs and by standardising calculation methods across institutions.