What changed
This Master Circular updates the previous July 1, 2010 circular by incorporating all instructions issued up to June 30, 2011. It consolidates directives on interest rates on advances into one document, including sections on base rate, floating rate loans, penal interest, and consortium lending.
What it means for you
Banks must ensure their lending rate policies align with the updated circular, particularly the base rate framework and guidelines on floating rates. The circular reinforces that interest rates should be transparent and not excessive, and it provides a single reference for compliance.
What you must do
- Review and update your bank's interest rate policy to comply with the 2011 Master Circular.
- Ensure all loan agreements include an enabling clause for interest rate changes as per para 2.6.
- Align floating rate loan terms with the guidelines in para 2.4.
- Verify that penal interest charges are levied as per para 2.5 and not excessive.
- Train lending staff on the consolidated guidelines, especially base rate applicability.
Who it affects
All scheduled commercial banks (excluding RRBs), Lending operations teams, Risk and compliance departments, Loan product managers
Does this circular change the base rate calculation method?
No, the circular consolidates existing guidelines; the illustrative methodology for base rate computation remains as per Annex 2 of the circular.
Are regional rural banks covered by this circular?
No, the circular explicitly excludes Regional Rural Banks (RRBs) from its application.
What is the key takeaway for banks regarding floating rate loans?
Banks must follow the guidelines in para 2.4, which require transparency in how floating rates are reset and linked to the base rate or other benchmarks.