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.
With banks required to determine their benchmark lending rates taking into account the marginal cost of funds [unlike the base rate system where banks had the discretion to choose between the average cost or the marginal cost (or blended cost) of funds], lending rates were expected to be more sensitive to the changes in the policy rate under the MCLR system vis-à-vis its predecessor (the base rate).