the reserve bank will link the base rate for loans given by banks to the mclr starting april 1 2018 ie from the new financial year the marginal cost of funds based lending rates mclr system was introduced on april 1 2016 to tackle the problems of the base rate regime with the introduction of the mclr system it was expected that the existing base rate linked loans and other credit exposures would also migrate to mclr system however this has not happenedit is observed however that a large proportion of bank loans continue to be linked to the base rate despite the reserve bank highlighting this concern in earlier monetary policy statements since mclr is more sensitive to policy rate signals it has been decided to harmonize the methodology of determining benchmark rates by linking the base rate to the mclr with effect from april 1 2018 says an rbi press release here todaywhile the impact of this on existing borrowers will become clear only when details of this harmonisation are known however prima facie it appears that once base rate is linked to mclr the former will automatically increase or decrease in tandem with the latter without any specific action required for adjustment this may benefit the existing borrowers whose loans are still linked to the base rateearlier there had been a lot of complaints that whenever rbi reduced interest rates banks took a long time to pass on the benefit to borrowers and often the benefit was passed on only partially ie banks did not reduce their lending rates by as much as rbi cut the benchmark ratesfollowing these complaints rbi had introduced the mclr system todays announcement appears to be a step in the same directionunder the base rate regime the banks were either reluctant to cut their lending rates post rbi repo rate cuts or did so with a time lag a new method of bank lending called marginal cost of funds based lending rate mclr was therefore put in place for all loans including home loans given after april 1 2016 under the mclr mode the banks have to review and declare overnight one month three months six months one year two years three years rates each month however when it came to lending in the mclr based lending the interest rate of the home loan gets repriced on a periodical basis as per the rbi rules the periodicity of reset shall be one year or lower the exact periodicity of reset shall form part of the terms of the loan contract most borrowers shifted their loans from the base rate to the mclr mode the primary reason to switch from base rate to mclr has to be the sluggishness seen in banks passing on the benefits of rbi rate cuts to borrowers the mclr on the other hand takes into account the marginal cost of funds which includes the rate at which the bank raises deposits and other cost of borrowings this largely