About Marginal Cost of funds based Lending rate(MCLR)
Marginal Cost of funds based Lending rate(MCLR)
Marginal Cost of funds based Lending rate (MCLR)
Lending is an activity that fetches huge profit to the Banks and Financial Institutions that offer money to its customers in the form of loans and advances. However, it becomes a viable one to customers only when the cost of the same is affordable by them. MCLR targets to address this aspect of lending by Banks. MCLR means Marginal Cost of Funds based Lending Rate. Let us look at reasons for introducing MCLR, its components, calculations and guidelines in detail for clear understanding.
Reasons for introducing MCLR
Funding rates depend highly on monetary Policy changes and so it is important to understand the advantages of shifting the same from base rate to MCLR Rates. Some reasons are enlisted below for clarity.
- To bring in transparent systems pertaining to the fixation of Interest rates for advances given to customers
- To increase the competitiveness of Banks by focussing on measures that would enhance their value on the long run
- To enable Banks to contribute in a considerable manner to the economic growth of the Country
- To ensure the gelling of policy rates along with the lending rates
- To enable a win-win situation for both the Banks as well as the customers by working on the interest rates
Components of MCLR
MCLR differs from the base rate in many aspects. Let us look at some of the main components of MCLR that differentiates MCLR from the base rate.
- Cost calculated in MCLR is highly marginal
- The minimum rate of return factor is completely excluded from MCLR
- MCLR is highly dynamic since the rate revision happens on a monthly basis
- Repo rate is considered for calculating the Marginal rate making it profitable for Banks and affordable for the general public
Calculation of MCLR
MCLR is basically calculated taking into consideration the negative carry on account aspect of CRR (Cash Reserve Ratio), Tenor Premium and Operating costs. The simple formula involved in the calculation of MCLR is as follows.
Marginal Cost of Funds is equal to (Return on Net worth X 8%) plus (Marginal cost of borrowings X 92%)
The actual figures that are arrived after calculation of this formula differ from one Bank to another based on their real-time performance.
Guidelines on MCLR
Some guidelines for implementing MCLR are given below.
- Banks are to review MCLR system on a monthly basis
- The review is to be published on the specified date every month
- Banks that do not possess the wavelength to review MCLR on a monthly basis may do so once in a quarter. However such Banks must initiate monthly review soon coming out of the quarterly review system
- Banks may have their interest reset dates based on the floating rate of loans they offer to customers
- Such interest rate reset dates can be just once in a year or in periodicities that the Banks feels deem fit
- The floating rate of loans that prevails on the date when the first disbursement happens shall be in vogue until the next date it is reset