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Marginal Cost of Funds based Lending Rate

Marginal Cost of Funds based Lending Rate

Marginal Cost of Funds based Lending Rate (MCLR) will be the internal benchmark lending rates. Based upon this MCLR, interest rate for different types of customers should be fixed in accordance with their riskiness. MCLR is calculated using different components such as: a) Marginal cost of funds: The marginal cost that is the novel element of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on net-worth. According to the Reserve Bank of India, the Marginal Cost should be charged on the basis of following factors: Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit Borrowings - Short term interest rate or the Repo rate etc., Long term rupee borrowing rate Return on net-worth - in accordance with capital adequacy norms. b) Negative carry on account of Cash Reserve Ratio (CRR): It is the cost that the banks have to incur while keeping reserves with the RBI. The RBI is not giving an interest for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people. c) Operating Costs: It is the operating expenses incurred by the banks. d) Tenor Premium: It denotes that higher interest can be charged from long term loans. The MCLR applicable from 1 April, 2016 have to be revised monthly by considering some new factors including the Repo rate and other borrowing rates.

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