What is Marginal cost of funds-based lending rate (MCLR)?

About Marginal cost of funds-based lending rate:

• It is the minimum interest rate below which no bank is permitted to lend money.
•  It is determined by banks internally, depending upon the loan repayment time.
• The Reserve Bank of India introduced the MCLR methodology for fixing interest rates on 1 April 2016.
•  It replaced the base rate structure, which had been in place since July 2010.  
• The rate is determined internally by the bank depending on the period left for the repayment of a loan.
• MCLR is calculated based on four components Marginal cost of fund, Negative carry on account of cash reserve ratio, Operating costs, Tenor premium

What is the difference between MCLR and base rate

• MCLR is an advanced version of the base rate.
• The base rate is based on the average cost of funds, but MCLR is based on the marginal or incremental cost of money.
•  MCLR depends on the repo rates changed by RBI while Base Rate does not depend on the repo rates changed by RBI. 

 

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 Q1) What is base rate?

Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers.

Source: Why SBI, BoB, IOB have raised MCLR by up to 15 bps, and what its impact could be