3/23/2017 MarginalCostoffundsbasedLendingrate(MCLR)Arthapedia

MarginalCostoffundsbasedLendingrate(MCLR)
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Themarginalcostoffundsbasedlendingrate(MCLR)referstotheminimuminterestrateofabankbelow
whichitcannotlend,exceptinsomecasesallowedbytheRBI.Itisaninternalbenchmarkorreferenceratefor
thebank.MCLRactuallydescribesthemethodbywhichtheminimuminterestrateforloansisdeterminedbya
bankonthebasisofmarginalcostortheadditionalorincrementalcostofarrangingonemorerupeetothe
prospectiveborrower.

TheMCLRmethodologyforfixinginterestratesforadvanceswasintroducedbytheReserveBankofIndia
witheffectfromApril1,2016.Thisnewmethodologyreplacesthebaserate
(http://www.arthapedia.in/index.php?title=Base_Rate)systemintroducedinJuly2010.Inotherwords,allrupee
loanssanctionedandcreditlimitsrenewedw.e.f.April1,2016wouldbepricedwithreferencetotheMarginal
CostofFundsbasedLendingRate(MCLR)whichwillbetheinternalbenchmark(meansareferencerate
determinedinternallybythebank)forsuchpurposes.

ExistingloansandcreditlimitslinkedtotheBaseRate(http://www.arthapedia.in/index.php?title=Base_Rate)
(internalbenchmarkrateusedtodetermineinterestratesuptill31March2016)orBenchmarkPrimeLending
Rate(BPLRortheinternalbenchmarkrateusedtodeterminetheinterestratesonadvances/loanssanctioned
uptoJune30,2010.)wouldcontinuetillrepaymentorrenewal,asthecasemaybe.However,existing
borrowerswillhavetheoptiontomovetotheMarginalCostofFundsbasedLendingRate(MCLR)linkedloan
atmutuallyacceptableterms.

ReasonsforintroducingMCLR

RBIdecidedtoshiftfrombaseratetoMCLRbecausetheratesbasedonmarginalcostoffundsaremore
sensitivetochangesinthepolicyrates(http://www.arthapedia.in/index.php?title=Policy_Rate).Thisisvery
essentialfortheeffectiveimplementationofmonetarypolicy.PriortoMCLRsystem,differentbankswere
followingdifferentmethodologyforcalculationofbaserate/minimumratethatiseitheronthebasisof
averagecostoffundsormarginalcostoffundsorblendedcostoffunds.Thus,MCLRaims

Toimprovethetransmissionofpolicyratesintothelendingratesofbanks.
Tobringtransparencyinthemethodologyfollowedbybanksfordetermininginterestratesonadvances.
Toensureavailabilityofbankcreditatinterestrateswhicharefairtoborrowersaswellasbanks.
Toenablebankstobecomemorecompetitiveandenhancetheirlongrunvalueandcontributionto
economicgrowth.

CalculationofMCLR

TheMCLRisatenorlinkedinternalbenchmark(tenormeanstheamountoftimeleftfortherepaymentofa
loan).TheactuallendingratesaredeterminedbyaddingthecomponentsofspreadtotheMCLR.Bankswill
reviewandpublishtheirMCLRofdifferentmaturities,everymonth,onapreannounceddate.

TheMCLRcomprisesofthefollowing:

a)MarginalcostoffundswhichisanovelconceptundertheMCLRmethodologycomprisesofMarginalcost
ofborrowingsandreturnonnetworth,appropriatelyweighed.

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i.e.,

Marginalcostoffunds=(92%xMarginalcostofborrowings)+(8%xReturnonnetworth)

Thus,marginalcostofborrowingshasaweightageof92%whilereturnonnetworthhas8%weightageinthe
marginalcostoffunds.Here,theweightgiventoreturnonnetworthissetequivalenttothe8%ofriskweighted
assetsprescribedasTierIcapitalforthebank.Themarginalcostofborrowingreferstotheaverageratesat
whichdepositsofasimilarmaturitywereraisedinthespecifiedperiodprecedingthedateofreview,weighed
bytheiroutstandingbalanceinthebanksbooks.

i.e,

Ratesofferedondepositsofasimilarmaturityonthedateofreview/ratesatwhichfundsraisedxBalance
outstandingasapercentageoftotalfunds(otherthanequity)asonanyday,butnotmorethansevencalendar
dayspriortothedatefromwhichtheMCLRbecomeseffective.

b)Negativecarryonaccountof'Cashreserveratio(CRR)NegativecarryonthemandatoryCRRarises
becausethereturnonCRRbalancesisnil.NegativecarryonmandatoryStatutoryLiquidityRatio(SLR)
balancesmayariseiftheactualreturnthereonislessthanthecostoffunds.

c)OperatingCostassociatedwithprovidingtheloanproduct,includingcostofraisingfunds,butexcluding
thosecostswhichareseparatelyrecoveredbywayofservicecharges.

d)TenorPremiumThechangeintenorpremiumcannotbeborrowerspecificorloanclassspecific.Inother
words,thetenorpremiumwillbeuniformforalltypesofloansforagivenresidualtenor.

Banksmaypublisheverymonththeinternalbenchmark/MCLRforthefollowingmaturities:

OvernightMCLR,
OnemonthMCLR,
ThreemonthMCLR,
SixmonthMCLR,
OneyearMCLR.
MCLRforanyothermaturitywhichthebankconsidersfit

Bankshavethefreedomtoofferallcategoriesofadvancesonfixedorfloatinginterestrates.Bankshaveto
determinetheiractuallendingratesonfloatingrateadvancesinallcasesbyaddingthecomponentsofspreadto
theMCLR.Accordingly,therecannotbelendingbelowtheMCLRofaparticularmaturity,forallloanslinked
tothatbenchmark.FixedrateloansuptothreeyearsarealsopricedwithreferencetoMCLR.

However,certainloanslikeFixedrateloansoftenorabovethreeyears,specialloanschemesformulatedby
GovernmentofIndia,Advancestobanksdepositorsagainsttheirowndeposits,Advancestobanksown
employeesetc.arenotlinkedtoMCLR.

BaseRatevsMCLR

Baseratecalculationisbasedoncostoffunds,minimumrateofreturn,i.emarginorprofit,operatingexpenses
andcostofmaintainingcashreserveratiowhiletheMCLRisbasedonmarginalcostoffunds,tenorpremium,
operatingexpensesandcostofmaintainingcashreserveratio.Themainfactorofdifferenceisthecalculation
ofmarginalcostunderMCLR.Marginalcostischargedonthebasisoffollowingfactorsinterestratefor
varioustypesofdeposits,borrowingsandreturnonnetworth.ThereforeMCLRislargelydeterminedby
marginalcostoffundsandespeciallybydepositratesandreporates(http://arthapedia.in/index.php?
title=Repo_Rate_and_Reverse_Repo_Rate).

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References
ReserveBankofIndia(InterestRateonAdvances)Directions,2016.
(https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10295)
FrequentlyAskedQuestions(FAQs)onMarginalCostofFundsbasedLendingRate(MCLR).
(https://www.rbi.org.in/Scripts/FAQView.aspx?Id=111)

Contributedby
Ms.GayatriNair,(IES2004)(http://www.ies.gov.in/myaccountprofileview.php?memid=316)
Emailgayatrinair25@gmail.com(mailto:gayatrinair25@gmail.com)

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