What is the Full form of MCLR?
The MCLR full form is “Marginal Cost of Funds-based Lending Rate.” The minimum interest rate at which a bank may lend is the MCLR. MCLR is an internal standard tied to tenor, which means that the bank determines the rate directly depending on the remaining loan repayment period.
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As of 1 April 2016, the RBI has implemented the MCLR mechanism for establishing advanced interest rates. It replaced the old approach of the base rate system, which was implemented in July 2010 to measure commercial bank lending rates. RBI established MCLR on April 1, 2016, to determine lending interest rates.
How is MCLR determined?
Four components are used to calculate the MCLR, which is directly tied to the real rate of deposit.
Tenor premium
The tenor is the amount of time the borrower has to repay the loan. The tenor premium is uniform across all loan types and is neither borrower- nor loan-type-specific.
The marginal cost of funds
The marginal cost of funds consists of the marginal cost of borrowings and net worth return.
Operating expenses
It relates to the delivery of the loan product and includes the cost of capital-raising. The price does not include service fees.
Negative Carry on account of Cash Reserve Ratio (CRR)
It occurs when the return on the remaining CRR balance is zero.
Justifications for MCLR introduction
Before the MCLR scheme, banks measured the base rate / minimum rate using a variety of factors, such as the marginal cost of funds, the average cost of funds, or the combined cost of funds. The justifications for implementing MCLR are stated below.
- To bring clarity to the determination of interest rates.
- Making bank loans available at reasonable interest rates for lenders and banks.
- To assist banks in becoming more efficient, enhancing their long-term profitability, and contributing to economic growth.
