MCLR is the short form used for marginal cost of funds based lending rate. The RBI (Reserve Bank of India) has mandated that banks use MCLR to price all new floating rate loans from 1st April 2016 onwards. MCLR is a better way of determining the interest rates on loans as it reflects the true cost of funds to the banks.
Previously, banks were using the base rate system to price their loans, which was not an accurate reflection of the true cost of funds to the bank. The MCLR system will help ensure that banks pass on the benefit of lower interest rates to their customers quickly and also help in reducing lending rates over time.
What is MCLR?
The MCLR full form is the Marginal Cost of Funds based Lending Rate. It is the minimum interest rate at which a bank can lend money. The MCLR was introduced by the Reserve Bank of India (RBI) in April 2016, as a replacement for the Base Rate system.
Banks are required to price all new floating rate personal or retail loans and loans to micro and small enterprises off the MCLR. The MCLR will be reviewed on a monthly basis by banks and reset every year. The resetting of rates will ensure that changes in the cost of funds are passed on to customers quickly.
The RBI has stipulated that banks must use a formula to calculate the MCLR, which takes into account:
* The marginal cost of funds
* Operating expenses
* Negative carry on account of CRR requirements
The marginal cost of funds includes:
* Interest on deposits
* Interest on borrowings
* Return on net-owned funds
Operating expenses include:
* Salary and other employee related costs
* Premises related costs
* Cost of selling and distribution
* General administrative expenses
What is the full form of MCLR?
The full form of MCLR is “Minimum Cash Reserve Ratio”. MCLR is the minimum interest rate that a bank must offer its customers for deposits. The Reserve Bank of India (RBI) sets the MCLR every year.
What is the difference between MCLR and Base Rate?
MCLR is the Marginal Cost of Funds based Lending Rate. In simple terms, MCLR is the minimum interest rate below which a bank cannot lend. The MCLR was introduced by RBI in April 2016 as a part of Monetary Policy to ensure effective transmission of policy rates into the banking system.
The Base Rate is the minimum interest rate set by a bank from which it can lend to its customers. The RBI deregulated the base rate in 2010 and since then banks have been free to set their own base rate. However, banks must review and reset their base rates at least once in every three months.
How is MCLR calculated?
MCLR is the minimum interest rate of a bank below which it cannot lend, irrespective of the creditworthiness of the borrower. MCLR is always higher than thebase rate. The Reserve Bank of India (RBI) had introduced the marginal cost of funds-based lending rate (MCLR) system from 1 April 2016 as part of its monetary policy to ensure that banks pass on lower interest rates to their borrowers.
The RBI had directed all banks to price their loans, both fresh and existing, in line with MCLR from 1 April 2016 onwards. Prior to this, banks were pricing their loans based on the base rate, which was not linked to changes in the policy repo rate announced by RBI under its monetary policy.
What are the benefits of MCLR?
The Marginal Cost of Fund based Lending Rate (MCLR) is the minimum interest rate that a bank can lend at. MCLR was introduced by the RBI in 2016 as a replacement for the Base Rate system. MCLR is a more accurate way of determining lending rates as it takes into account the marginal cost of funds, which fluctuates with changes in RBI’s repo rate.
Banks are required to price all new floating rate loans for both retail and commercial purposes off the MCLR. The reset period for MCLR is typically one year, but can be shorter or longer depending on the tenor of the loan.
MCLR benefits both borrowers and lenders. For borrowers, it ensures that they are not charged an interest rate higher than necessary. For lenders, it provides clarity on where their lending rates stand in relation to their competitors.
MCLR Loan
MCLR, or the marginal cost of funds based lending rate, is the minimum interest rate that a bank can charge for a loan. MCLR is calculated based on the cost of funds to the bank and is typically higher than the base rate. The base rate is the minimum interest rate set by the Reserve Bank of India (RBI) at which banks can lend money to customers.
Banks are required to price all loans and advances above MCLR. For example, if MCLR is 10% and base rate is 9%, then the effective interest rate on a loan will be 11%. This means that when you take a loan from a bank, you will be paying an interest rate which is 1% more than what RBI has set as the minimum lending rate. So, whenever RBI changes its policy rates, there is a direct impact on your EMIs. If RBI reduces the repo rate (the rate at which it lends money to banks), then banks will get cheaper funds and this will bring down MCLR too. This in turn will reduce your EMIs on loans linked to MCLR
Also Read: Section 54 of the Income Tax Act