In practice, the flexibility accorded to banks in the determination of cost of funds – average, marginal or blended cost – caused opacity in the determination of lending rates by banks and clouded an accurate assessment of the speed and strength of the transmission.
Moreover, banks often adjusted the spread over the base rate to benefit the new borrowers while leaving the transmission through the base rate weak for existing borrowers. The weaknesses and rigidities observed with the transmission under the base rate system led to the present system, i.e., the MCLR system effective April 1, 2016.