{"id":18214,"date":"2023-12-16T09:38:33","date_gmt":"2023-12-16T04:08:33","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=18214"},"modified":"2025-04-05T09:26:01","modified_gmt":"2025-04-05T03:56:01","slug":"mclr","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/mclr\/","title":{"rendered":"Marginal Cost of Funds based Lending Rate (MCLR)"},"content":{"rendered":"<h2>About Marginal Cost of Funds based Lending Rate (MCLR)<\/h2>\n<ul>\n<li>MCLR is the\u00a0minimum lending rate\u00a0below which a\u00a0bank is not permitted to lend.<\/li>\n<li>It is aimed at\u00a0facilitating the calculation of the minimal\u00a0interest rate for various types of loans that banks offer.<\/li>\n<li>The Reserve Bank of India (RBI)\u00a0introduced\u00a0the MCLR methodology for fixing interest rates on\u00a0April 1, 2016, in order\u00a0to enhance the effectiveness of monetary policy transmission as well as increase transparency in the rate of interest setting procedure.\u00a0<\/li>\n<li>It\u00a0replaced the base rate structure, which had been in place since July 2010.<\/li>\n<li>How is MCLR calculated?\n<ul>\n<li>MCLR is\u00a0determined internally by the bank\u00a0depending on the period left for the repayment\u00a0of a loan.<\/li>\n<li>MCLR is\u00a0closely linked to the actual deposit rates and is\u00a0calculated based on four components:<\/li>\n<li>the\u00a0marginal cost of funds<\/li>\n<li>negative carry on account of cash reserve ratio<\/li>\n<li>operating costs<\/li>\n<li>tenor premium.<\/li>\n<\/ul>\n<\/li>\n<li>Under the MCLR regime, banks are free to offer all categories of loans at fixed or floating interest rates.<\/li>\n<li>The\u00a0actual lending rates for loans of different categories and tenors\u00a0are determined by adding the components of spread to MCLR.<\/li>\n<li>Therefore, the bank cannot lend at a rate lower than the MCLR of a particular maturity for all loans linked to that benchmark.<\/li>\n<li>Banks review\u00a0and publish MCLRs\u00a0of different maturities, every month.\u00a0<\/li>\n<li>Certain loan rates,\u00a0like those of\u00a0fixed-rate loans with tenors above three years and\u00a0special loan schemes\u00a0offered by the government,\u00a0are not linked to MCLR.<\/li>\n<\/ul>\n<h2>What is the difference between MCLR and Base rate?<\/h2>\n<ul>\n<li>MCLR is an advanced version of the base rate.<\/li>\n<li>The\u00a0base rate is the\u00a0minimum rate of interest set by the RBI; no financial institution can lend at an interest rate below the base rate.<\/li>\n<li>MCLR is an internal benchmarking system\u00a0applied by a financial institution, under which\u00a0they can set their own lending rates considering a spread factor.<\/li>\n<li>The\u00a0base rate is based on the average cost of funds, but the\u00a0MCLR is based on the marginal or incremental\u00a0cost of money.<\/li>\n<li>The\u00a0base rate does not get impacted\u00a0by the revision of RBI\u2019s repo rate,\u00a0while MCLR gets impacted as and when RBI revises the repo rate.<\/li>\n<li>Usually, the minimum rate of return or\u00a0profit margin is taken into consideration while deriving the base rate. While determining\u00a0the MCLR, the tenor premium is taken into consideration.About Marginal Cost of Funds based Lending Rate (MCLR):<\/li>\n<li>MCLR is the\u00a0minimum lending rate\u00a0below which a\u00a0bank is not permitted to lend.<\/li>\n<li>It is aimed at\u00a0facilitating the calculation of the minimal\u00a0interest rate for various types of loans that banks offer.<\/li>\n<li>The Reserve Bank of India (RBI)\u00a0introduced\u00a0the MCLR methodology for fixing interest rates on\u00a0April 1, 2016, in order\u00a0to enhance the effectiveness of monetary policy transmission as well as increase transparency in the rate of interest setting procedure.\u00a0<\/li>\n<li>It\u00a0replaced the base rate structure, which had been in place since July 2010.<\/li>\n<li>How is MCLR calculated?\n<ul>\n<li>MCLR is\u00a0determined internally by the bank\u00a0depending on the period left for the repayment\u00a0of a loan.<\/li>\n<li>MCLR is\u00a0closely linked to the actual deposit rates and is\u00a0calculated based on four components:<\/li>\n<li>the\u00a0marginal cost of funds<\/li>\n<li>negative carry on account of cash reserve ratio<\/li>\n<li>operating costs<\/li>\n<li>tenor premium.<\/li>\n<\/ul>\n<\/li>\n<li>Under the MCLR regime, banks are free to offer all categories of loans at fixed or floating interest rates.<\/li>\n<li>The\u00a0actual lending rates for loans of different categories and tenors\u00a0are determined by adding the components of spread to MCLR.<\/li>\n<li>Therefore, the bank cannot lend at a rate lower than the MCLR of a particular maturity for all loans linked to that benchmark.<\/li>\n<li>Banks review\u00a0and publish MCLRs\u00a0of different maturities, every month.\u00a0<\/li>\n<li>Certain loan rates,\u00a0like those of\u00a0fixed-rate loans with tenors above three years and\u00a0special loan schemes\u00a0offered by the government,\u00a0are not linked to MCLR.<\/li>\n<\/ul>\n<h2>What is the difference between MCLR and Base rate?<\/h2>\n<ul>\n<li>MCLR is an advanced version of the base rate.<\/li>\n<li>The\u00a0base rate is the\u00a0minimum rate of interest set by the RBI; no financial institution can lend at an interest rate below the base rate.<\/li>\n<li>MCLR is an internal benchmarking system\u00a0applied by a financial institution, under which\u00a0they can set their own lending rates considering a spread factor.<\/li>\n<li>The\u00a0base rate is based on the average cost of funds, but the\u00a0MCLR is based on the marginal or incremental\u00a0cost of money.<\/li>\n<li>The\u00a0base rate does not get impacted\u00a0by the revision of RBI\u2019s repo rate,\u00a0while MCLR gets impacted as and when RBI revises the repo rate.<\/li>\n<li>Usually, the minimum rate of return or\u00a0profit margin is taken into consideration while deriving the base rate. While determining\u00a0the MCLR, the tenor premium is taken into consideration.<\/li>\n<\/ul>\n<hr \/>\n<h3>Q1) What is the cash reserve ratio (CRR)?<\/h3>\n<p>CRR is the percentage of a bank&#8217;s total deposits that it needs to maintain as liquid cash. This is an RBI requirement, and the cash reserve is with the RBI. A bank does not earn interest on this liquid cash maintained with the RBI and neither can it use this for investing and lending purposes.<\/p>\n<p><strong>Source:<\/strong> <a href=\"https:\/\/www.business-standard.com\/finance\/personal-finance\/loan-emis-to-rise-sbi-hikes-mclr-by-up-to-10-basis-points-123121500324_1.html\" target=\"_blank\" rel=\"nofollow noopener\"><u>Loan EMIs to rise! SBI hikes MCLR by up to 10 basis points<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>MCLR is the minimum lending rate below which a bank is not permitted to lend.<\/p>\n","protected":false},"author":5,"featured_media":18215,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":{"0":"post-18214","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-prelims-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/18214","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=18214"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/18214\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/18215"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=18214"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=18214"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=18214"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}