Marginal Cost of Funds based Lending Rate (MCLR) is the new RBI guideline for commercial banks to set lending rates.
- It has replaced the earlier base rate system from April 1, 2016.
- Marginal cost of funds is a key component in calculating MCLR. Changes in key rates like repo rate, will change the marginal cost of funds and so will impact MCLR.
- MCLR is a tenure-based benchmark, not a single rate. Banks have to publish at least five MCLR rates across the overnight, one-month, three-month, six-month and one-year tenures.
- The final lending rates offered by the banks is arrived at by adding the ‘spread’ to the MCLR rate.
- All floating rate loans are linked to MCLR.
- Existing borrowers with loans linked to base rate can continue with them till maturity or can switch to the MCLR system. However, once a borrow opts for MCLR, they can’t switch back.
Following are the main components of MCLR:
- Marginal cost of funds;
- Negative carry on account of CRR;
- Operating costs;
- Tenor premium.
Negative carry on account of CRR: is the cost that the banks have to incur while keeping reserves with the RBI. The RBI does not give an interest for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people.
Operating cost: is the operating expenses incurred by the banks like operating cost of ATMs, infrastructure, etc.
Tenor premium: denotes that higher interest can be charged from long term loans given to individuals/companies.
Marginal Cost: The marginal cost that is the important element of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on networth. According to the RBI, the Marginal Cost should be charged on the basis of following factors:
- Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
- Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
- Return on networth – in accordance with capital adequacy norms.