Context:
In anticipation of the beginning of a softer rate cycle, several banks are looking to raise the share of their marginal cost-based lending rate (MCLR)-linked loans to prevent their net interest margin from falling sharply, according to industry executives.
Marginal Cost of Funds-based Lending Rate (MCLR)
The Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum interest rate that a bank can charge for a loan. It’s based on the cost of borrowing funds, the bank’s operating costs, and other factors. The Reserve Bank of India (RBI) implemented MCLR on April 1, 2016.
How MCLR works?
- MCLR is a tenor-linked rate, meaning it varies based on the length of the loan.
- Banks use MCLR to determine the interest rate for loans.
- MCLR is the minimum interest rate that banks can charge, except in certain cases.
- MCLR is fixed for borrowers unless the RBI revises it.
Factors that affect MCLR
- Marginal cost of funds: The cost of borrowing funds, such as from savings deposits, term deposits, or other banks
- Operating costs: The cost of generating cash, including service charges
- Statutory liquidity ratio (SLR): The reserve that banks are required to keep
Benefits of MCLR
- MCLR ensures that banks charge interest rates that are true to the consumers.
- MCLR improves the openness of the structure used by banks to calculate interest rates.
