The actual lending rate is based on MCLR plus a spread (business strategy and credit risk premium). The base rate system was allowed to be in operation concomitantly for the loans already contracted, pending their maturity or a shift to the MCLR system at mutually agreeable terms between the bank and the borrower.
The expected benefits of the MCLR system – better transparency, more flexibility and faster transmission – have, however, continued to elude as documented in the Reserve Bank’s recent study - “Report of the Internal Study Group to Review the Working of the Marginal Cost of Funds Based Lending Rate System” (Chairman: Dr. Janak Raj), the analysis wherein indicates that the transmission: •  has been slow and incomplete under both the base rate and the MCLR systems, although it has improved since November 2016 under the pressure of large surplus liquidity in the system post demonetisation (Table 1).