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