Full Form of MCLR, Marginal Cost of Funds Based Lending Rate

What is MCLR?

Why is MCLR necessary?

• The RBI occasionally modifies the repo rate and other rates, but banks take some time to adjust their interest rates to the new rates.
• Most commercial banks do not alter their lending rates for consumers.
• Ultimately, the bank clients do not benefit as the Reserve Bank of India intended. Until 2016, the RBI had orally ordered commercial banks to adjust their lending rates in response to changes in the repo rate.
• Therefore, to assist the customers, the RBI introduced MCLR.
• Since the repo rate is considered when calculating the new MCLR, the lending rates will change quickly, and the commercial banks will be required to comply with the RBI quickly.

Components of MCLR

• Return on assets (capital adequacy norms).
• Both the repo rate and the long-term borrowing rate apply.
• Banks' interest rates are disclosed.
• Term deposit.
• Current deposit.
• Savings deposit.
• Deposit of foreign currencies.

Benefits of MCLR

• The monthly revision of the MCLR is advantageous to bank customers, particularly those who borrow loans.
• The commercial paper market and the banks compete.
• For enterprises, it lowers the cost of borrowing.
• The Indian banking sector strives to meet global norms.

MCLR calculation method

• The term of the loan affects the cost of borrowing.
• The dangers associated with a loan increase with its length.

• It represents the typical rate at which deposits with comparable maturities were raised in the period just before the review date. This expense appears as an outstanding amount in the bank's books.
• The Return on Net Worth component of the marginal cost of funds is 8%, and the Marginal Cost of Borrowings component is 92%.

• When there is no return on the CRR balance, the Cash Reserve Ratio (CRR) has a negative carry.
• When the real return is less than the cost of the funds, negative carry results.