Marginal Cost of Funds based Lending Rate

Marginal Cost of Funds based Lending Rate (MCLR) is the newly introduced business loan by banks at marginal cost. It is introduced since April 2016, and the new loan module is working as a convenient option for people looking for business loan at marginal cost.

The advantage of MCLR is two way for its consumers.

  • For no-risk customers the rate will be lower than other business loan module,
  • Interest rate can be changed depending on repo rate and other borrowing rates prevailing in market.

According to RBI directive, fixed five benchmarks have been decided and that corresponds to different loan tenure. The tenure can be for one day to one year time.

The foundation of MCLR loan sets on two major points:

  • Interest rate available by banks on deposits, and
  • Repo rate that banks provide to get hold of funds from the RBI, as chief factors for its approximation.

How MCLR Works?

Marginal Cost of Funds-based Lending Rate (MCLR) confirms that the lending rates are amended being based on the latest repo rates prevailing, the marginal cost of funds offered by the bank and the prevailing premium. This indicates to the fact that a specific bank’s lending rates may alter more frequently than former. MCLR rates are checked every month but are predetermined for a stipulated period for at least 1 year with respect to long-term loans.

How to Calculate MCLR?

Marginal Cost of Funds based Lending Rate (MCLR) will be the average when it is about the speculation of borrowing rates at bank’s level. Well-known loan options such as home loans will absolutely be influenced as banks are instructed to inform their base lending rates and rate of interest on deposits more regularly, at the same time as taking RBI’s current repo rate in active consideration. The actual calculation itself depends on 4 primary factors-

  • Marginal fee of funds
  • Operational fee of the banks
  • Costs induced in maintaining the Cash Reserve Ratio (CRR) with the RBI
  • Tenor Premium in which more interest is supposed to be charged from long term loans.

Marginal Cost of Funds: The base for the MCLR method, marginal cost of funds includes two main factors:

  • Marginal cost of loan from deposits or the RBI, and,
  • The return of the net worth soon after a precise deposit has developed.

As per the rules implemented by the RBI, banks need to consider the subsequent factors when deciding on the subsidiary (marginal) cost of funds,

  • Valid interest rates offered for diverse types of deposits including term, savings bank, current, and deposits in overseas currency.
  • Valid short term interest rate, repo rate, borrowing rate for longer tenures, etc.
  • In order with set norms, return on net worth.

It is noteworthy that the banks in-service costs and obligation with RBI in terms of the CRR are common platform between the Base Lending Rate process and Marginal Cost of Funds based Lending Rate (MCLR). However, in case of the later, marginal cost renders a prime role with the former; the cost is determined by averaging the interest added on the deposits. Also, MCLR is intended to be rationalized on a monthly basis as weighed against to the base rate method that is typically static, until rolled into action.


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Sheetal Pawar

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