{"id":180875,"date":"2022-04-23T19:00:51","date_gmt":"2022-04-23T13:30:51","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=180875"},"modified":"2022-04-23T18:04:17","modified_gmt":"2022-04-23T12:34:17","slug":"marginal-cost-of-funds-based-lending-rates-mclr","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/marginal-cost-of-funds-based-lending-rates-mclr\/","title":{"rendered":"Marginal Cost of Funds-based Lending Rates (MCLR) – Explained, pointwise"},"content":{"rendered":"\n\n\n\n
For\u00a07PM Editorial<\/strong>\u00a0Archives click\u00a0HERE <\/a>\u2192<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
Introduction<\/h5>\n

State Bank of India has raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years. SBI raised the MCLR by 10 basis points (bps) across tenures to 7.1% (from 7% earlier). Other public sector and private banks are set to raise MCLRs in the coming days. <\/span>It signals that the soft rates regime that has prevailed since 2019 may be over. As a result, borrowers who have taken home, vehicle, and personal loans will find their equated monthly instalments (EMIs) rising in the coming months.<\/span><\/p>\n

What is MCLR?<\/h5>\n

It is the minimum interest rate that a bank can lend at. The final rate of lending also includes risk premium<\/strong> and spread<\/strong> charged by banks.<\/span><\/p>\n

MCLR is a tenor-linked internal benchmark, which means the rate is determined<\/span> internally by the bank <\/b>depending on the period left for the repayment of a loan.<\/span><\/p>\n

MCLR is closely linked to the actual deposit rates and <\/span>calculated based on four components: (a)<\/b> The marginal cost of funds; (b)<\/strong> Negative carry on account of cash reserve ratio; (c)<\/strong> Operating costs; (d)<\/strong> Tenor premium.<\/span><\/p>\n

Under the MCLR regime, banks are free to offer all categories of loans on fixed or floating interest rates.<\/span><\/p>\n

Fixed-rate loans with tenors of up to three years are also priced according to MCLR. Banks review and publish MCLR of different maturities, every month.\u00a0<\/span><\/p>\n

Certain loan rates, like that of fixed-rate loans with tenors above three years and special loan schemes offered by the government, are not linked to MCLR.<\/span><\/p>\n\n\n\n
Key Terminologies<\/strong><\/p>\n

Repo Rate: <\/b>It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.<\/span><\/p>\n

Reverse Repo Rate:<\/b> It is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country.<\/span><\/p>\n

Standing Deposit Facility<\/b>: It allows banks to park their excess funds at a higher rate but <\/span>without taking any collateral<\/b> from the central bank.<\/span><\/p>\n

Internal Benchmark Lending Rate (IBLR):<\/b> These are a set of reference lending rates which are calculated after considering factors like the bank’s current financial overview, deposits and non performing assets (NPAs) etc. Some of IBLR include Base rate, MCLR etc..<\/span><\/p>\n

External Benchmark Lending Rate (EBLR<\/b>): Under this, lending rate is linked to a benchmark rate. RBI has offered banks the option to choose from 4 external benchmarking mechanisms: (a) <\/strong><\/span>The RBI repo rate; (b) <\/strong><\/span>The 91-day Treasury-bill yield; (c) <\/strong><\/span>The 182-day Treasury-bill yield; (d) <\/strong><\/span>Any other benchmark market interest rate as developed by the Financial Benchmarks India Pvt. Ltd.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

What is the background of MCLR?<\/h5>\n

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.<\/span><\/p>\n\n\n\n
What is the difference between MCLR and Base Rate<\/b>?<\/span><\/p>\n