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SBI raises marginal cost of funds-based lending rates (MCLR)

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  • Published
    25th Apr, 2022


State Bank of India (SBI), India’s largest commercial bank, recently raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years, signalling that the soft rates regime that has prevailed since 2019 may be over.


About Marginal Cost of Funds-Based Lending Rates (MCLR):

  • The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at.
  • MCLR is determined internally by the bank depending on the period left for the repayment of a loan.
  • The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016. It replaced the base rate structure, which had been in place since July 2010.
  • It is applicable to fresh corporate loans and floating rate loans taken before October 2019.
  • RBI then switched to the external benchmark linked lending rate (EBLR) system where lending rate is linked to benchmark rates like repo or Treasury Bill rates.

Other important rates

  • Repo rate: The interest rate that the RBI charges when commercial banks borrow money from it is called the repo rate.
  • Reverse repo rate: The interest rate that the RBI pays commercial banks when they park their excess cash with the central bank is called the reverse repo rate
  • Base rate: Base Rate is the lending rate calculated based on the total cost of funds of the banks and is the minimum interest rate at which a bank can lend except for loans to its own employees, its retired employees and against bank’s own deposits.
  • PLR: PLR (Prime Lending Rate) is the internal benchmark rate used for setting up the interest rate on floating rate loans sanctioned by Non-Banking Financial Companies (NBFC) and Housing Finance Companies (HFC).
    • PLR rate is calculated based on average cost of funds.
    • NBFC and HFC generally price their loan at discount on their existing PLR.
    •   Treasury bills or T-bills: They are money market instruments, are short term debt instruments issued by the Government of India. 

What changes will be seen after increase in MCLR?

  • EMIs are set to rise
  • Interest rates will rise
  • Banks expect a repo rate hike
  • Deposit rates will also rise

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