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MCLR (Marginal Cost of Funds based Lending Rate)

MCLR (marginal cost of funds based lending rate) is the lowest interest rate that a bank or lender can offer. Most banks cannot offer HOME LOAN interest rates lower than the marginal cost of funds based lending rate. However, certain exceptions can be made when allowed by the Reserve Bank of India (RBI).

The MCLR is a reference rate or internal benchmark for the financial institution. Marginal cost of funds based lending rate defines the process used to determine the minimum home loan rate of interest. The MCLR method was introduced in the Indian financial system by the Reserve Bank of India in the year 2016. The MCLR system has replaced the base rate system that was introduced in the year 2010. Thus, renewal of credit limits and sanctioning of loans is done as per MCLR norms.

Aims Of MCLR

♦ Improving transmission of the policy rate into lending rates of the banks.
♦ Bringing in transparency in the method followed by various banks for the determination of interest rates.
♦ Ensuring the avail ability of bank loan at rates that fair to both lenders and borrowers.
♦ Enabling the lenders and banks to be competitive and improve their worth in the long run.

Objective of RBI to introduce MCLR

Since January 2015, the Central bank of India has gradually reduced the repo rate by 150 basis points. As against this, commercial banks have reduced their base rates only by 50–60 basis points till March this year.

While cost of funds of banks have come down owing to lower policy rates, they could not match their lending rates with reduced policy rates as their average cost of borrowing still remained high because of older fixed deposits. To make sure that the reduced policy rates are passed on to borrowers by banks, RBI introduced the Marginal Cost of Funds based Lending Rate (MCLR) methodology as an alternative to the earlier base rate system.

Difference Between MCLR And Base Rate

MCLR Base Rate
  • MCLR or marginal cost of funds based lending rate has been introduced so that end borrowers can enjoy the benefits associated with repo rate cuts by the Reserve Bank of India (RBI). This has been implemented to make banking system even more transparent.
  • MCLR depends on factors like CRR (Cash Reserve Ratio), marginal cost of funds, tenor premium, and operating cost.
  • It is dependent on the repo rate changes made by the RBI.
  • Marginal cost of funds based lending rate can be different for different loan tenures.
  • The minimum rate of interest at which banks offer loan to their customers is called the base rate.
  • Base rate depends on different factors like profit, bank deposit rates, bank costs, etc.
  • It is not dependent on the repo rate set by the Reserve Bank of India.
  • Banks can choose to change the base rate quarterly.

MCLR depends on

  1. Tenor premium,
  2. Operating costs of the bank,
  3. Negative carry on Cash Reserve Ratio, and
  4. Marginal cost of funds

RBI Guidelines About MCLR

  • Fixed rate home loan will not be affected by MCLR.
  • Deposit balances and other borrowings are considered while computation of marginal cost of funds.
  • Banks must publish marginal cost of funds based lending rate for different tenors.
  • MCLR as on the sanction date of the floating rate home loan will stand the same till next reset date.
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