Marginal Cost of Funds-based Lending Rate (MCLR)

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Marginal Cost of Funds-based Lending Rate (MCLR)

Context:

With the interest rate cut cycle around the corner, Bank of India (BoI) is tweaking its lending strategy to enhance the share of the marginal cost of funds-based lending rate (MCLR)-linked loans from about 29 per cent now to 35 per cent in the next two to three years.

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.