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

Published: 23rd Apr, 2022

Context

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

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

CURRENT AFFAIRS FOR UPSC IAS

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

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CURRENT AFFAIRS FOR UPSC IAS

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

Still Have Questions?

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