MCLR Full Form

What is the Full form of MCLR?

The full form of MCLR is the Marginal Cost of Funds based Lending Rate. MCLR is the minimum rate of interest with which a bank can lend. MCLR is an internal standard linked to tenor, meaning that the bank decides the rate directly based on the time left to repay a loan.

RBI has implemented the MCLR system for setting advance interest rates, with effect from 1 April 2016. It replaced the previous process of the base rate system, which was introduced in July 2010 to measure the lending rates for commercial banks. MCLR was introduced by RNI on 1 April 2016 to assess the interest rates for loans.

How is MCLR calculated?

MCLR is directly related to the actual rate of deposit and is measured using four components.

  1. Tenor premium

The tenor is the length of time a borrower would have to pay back the loan. In all forms of loans, the tenor premium will be the same, which means it is not a borrower-specific.

  1. The marginal cost of funds

The marginal cost of funds relates to the rise in a business entity’s financial costs when one more rupee is raised by new funding. MCLR is determined based on the tenor of the loans.

  1. Operating costs

It is related to the delivery of the loan product, which involves the expense of raising money. Still, it does not take into consideration the costs that are built differently from service fees.

  1. Negative Carry on account of Cash Reserve Ratio (CRR)

It occurs when the return on the balance of CRR is nil. It happens whenever the actual return is less than the fund’s cost. It will impact the appropriate SLR (Statutory Liquidity Ratio) balance which must be maintained by each commercial bank.

Justifications for MCLR introduction

Before the MCLR scheme, the various banks used various criteria to measure the base rate / minimum rate, including focused on the marginal cost of funds or an average cost of funds or combined cost of funds. The reason for the implementation of MCLR is listed below.

  • To boost banks’ lending rates
  • Give clarity to the calculation of interest rates on bank advances
  • Making available bank credit at interest rates fair to lenders and banks
  • To help banks become more efficient and increase their profitability in the long term and contribute to economic development

Leave a Comment

Your Mobile number and Email id will not be published. Required fields are marked *

*

*

BOOK

Free Class