The Marginal Cost of Lending rate is the minimum lending rate below which commercial banks cannot lend.
MCLR 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. It is calculated based on four components:
1. Marginal cost of funds (it is the cost charged on the interest rate given on term deposit, savings, current account etc).
2. Carry on account of CRR (the amount charged by banks to compensate for its loss in keeping aside a cash reserve)
3. Operating cost (expenses of a bank in its day to day operations)
4. Tenor premium (premium charged for risks associated with long term lending)
Under this the lending rates are linked to the repo rate and as soon as the repo rate changes, the banks must change the lending rates too. It replaced the earlier base rate system of determining the lending rates.
