Print Friendly, PDF & Email

What is marginal cost of funds-based lending rate or MCLR?

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

What is marginal cost of funds-based lending rate or MCLR?

What to study?

For Prelims and Mains: MCLR- meaning, implications, how it is set, need for and significance.

Context: State Bank of India, the country’s largest lender, has reduced the marginal cost of fund-based lending rate (MCLR) by 35 basis points (bps) across all loan tenures. The new rate will come into effect from April 10.

The move comes after the Reserve Bank of India (RBI) reduced the repo rate by 75 bps in the last week of March.

What is MCLR? How is it determined?

It is the minimum interest rate that a bank can lend at. It is a tenor-linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan. MCLR is closely linked to the actual deposit rates and is calculated based on four components: the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.

Genesis of MCLR:

The Reserve Bank of India introduced the MCLR methodology for fixing interest rates from 1 April 2016. It replaced the base rate structure, which had been in place since July 2010.

Sources: the Hindu.