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MCLR stands for Marginal Costs of Funds based Lending Rate and it is the minimum lending rate which a bank cannot provide below this rate of lending. The Reserve Bank of India implemented this MCLR on 1st April, 2016 for setting the lending rate and it is an internal reference rate so that the banks can change rates on loans. The MCLR has been calculated based on the relative risk factors of the customers. Previously, the RBI cut the repo rate and the banks took a long time which reflects the changes to lend the rates for the borrowers.
Full form of MCLR
The full form of MCLR is Marginal Costs of Funds based Lending Rate and when the repo rate has been compared with the MCLR which can be seen in the lower 5 to 50 points. This situation can happen due to the close link up with the repo rate and this is a better transmission of the cut rate to the borrower by the help of RBI. The MCLR rate has been considered as the internal reference of the financial institutions such as the state banks, commercial banks and other urban regional banks. The MCLR can be defined as the process that can be used to consider the minimal home loan rate of interest. However, the MCLR system has been replaced with the base rate system in 2010 and as per the rules of MCLR the renewal credit limits can sanction the loans based on the norms of MCLR.
Objectives of MCLR
The purpose of the MCLR can be used as the internal reference rate for the banks and it helps the banks for defining the minimum rates on different types of loans. The objective of the MCLR is to improve the transmission of minimal rate policy based on the lending rates of the banks. The MCLR can also bring transparency on the methods of which have been followed by the several banks to determine the interest rate. It also ensures the availability of the bank loans within a fair rate so that the lenders and borrowers can be able to understand the interest rates of MCLR. It can enable the lender and bank to compete and can improve their operation for the long term.
Calculation of MCLR
The calculation of the MCLR can be undertaken as the current cost of the funds along with the incremental cost of the funds. The “marginal cost of the borrowings” has the evaluation on 92% of rate and 8% of only factors as well. The “operational cost” of the issuing loan can obtain the capital and can run the business in the long run. The “cost of carry in cash reserve ratio” can help the bank to deposit the account cash and this operation has been maintained by the RBI as well.
Difference Between Repo rate and MCLR
| Repo rate | MCLR |
|---|---|
|
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Conclusion
The MCLR has been referred to the incremental or marginal cost of the money and the tenor premium which has been factored in the calculation. The banks using this MCLR can be calculated with the help of taking this into the account of depositing and repo rates. It operates the costs and to maintain the cash reserve ratio with the help of the costs. The RBI introduced for the quick changes along with the effective transmission to change the repo rate for facilitating the customers. However, the banks could not decrease the interest rate after having the low interest rates on the repo rates. The lower repo rates have the ability to provide the ways of “External Benchmark on the Lending Rates”.
