MCLR Explained: Marginal Cost Lending Rate Basics
Why in the news
Expecting a softer rate cycle, several banks wanted a bigger share of MCLR-linked loans so that their net interest margin would not fall sharply.
About MCLR
- Meaning: floor interest rate for lending, based on the cost of raising funds, operating costs and other factors.
- Start: implemented by RBI on 1 April 2016.
- Tenor-linked: the rate differs with loan length.
- It stays fixed for the borrower until the reset is made.
Factors that shape MCLR
- Marginal cost of funds: cost of savings deposits, term deposits or borrowing from other banks.
- Operating costs: costs of generating cash, including service charges.
- SLR: the reserve banks must maintain.
Benefits
- Interest rates charged match the true cost for consumers.
- The method used by banks becomes more transparent.
Exam angle
- MCLR date of implementation: 1 April 2016.
- Minimum lending rate; tenor-linked.