Question

Which of the following factors are used to calculate Lending Rate under MCLR regime:

Which of the following statements is/are correct?

• A. 1 only
• B. 1 and 2 only
• C. 2 and 3 only
• D. 1,2 and 3

Answer 1

The correct option is D 1,2 and 3

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 uniform, which means it is not a borrower-specific.

2. 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. Marginal cost of fund is calculated taking into account all the borrowings of the bank..

3. Operating costs
It is related to the delivery of the loan product, which involves the expense for raising funds. However, it does not take into consideration , cost of providing services, which are recovered by way of service charge.

4. 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.