Base Rate Vs S MCLR New Base Rate Cost of Funds Margin Operating Expenses Marginal Cost of Funds Calculation of Lending Rate on Loans at Components Operating Expenses Tenor Premium Cach Decanta What is MCLR?
Benchmark Prime Lending Rate (BPLR) is the rate at which commercial banks charge their customers who are most credit worthy. According to the Reserve Bank of India (RBI), banks can fix the BPLR with the approval of their Boards. However, the RBl stipulates the interest rates as BPLR is influenced by the Repo rate and Cash Reserve Ratio (CRR) apart from individual bank's policy. . However, the BPLR system failed to bring transparency in the lending rates of the banks. The calculations of BPLR is not that transparent and sometimes the banks under this system could lend to customers below the BPLR. So, Base Rate was introduced subsequently
.Importance of base rate and prime lending rate The base rate gives a clear indication that the bank may not be able to lend below this. In short, it is a clear cap on lending. The Benchmark Prime Lending rate, allows creditworthy customers an opportunity to avail loans at these interest rates. If you are a customer who is looking to avail at these rates, you need to talk to your bank. Most of these banks have clearly set policies, which may not allow them to change the interest rates. This is fixed for most categories like home loans, though fo personal loans some private sector banks may be in a position to alter or change the rates
MCLR or Marginal Cost of fund based Lending Rate MCLR (Marginal Cost of funds based Lending Rate) replaced the earlier base rate system to determine the lending rates for commercial banks. RBl implemented it on 1 April 2016 to determine rates of interests for loans. It is an internal reference rate for banks to decide what interest they can levy on loans. For this, they take into account the additional or incremental cost of arranging additional rupee for a prospective buyer. .
Outcome of MCLR .After MCLR implementation, the interest rates will be determined as per the relative riskiness of individual customers. Previously, when RBI reduced the repo rate, the banks took a long time to reflect it in the lending rates for the borrowers. Under the MCLR regime, banks must adjust their interest rates as soon as the repo rate changes. .
How to calculate MCLR? MCLR calculation is linked to the tenor or the amount of time a borrower has to repay the loan. This tenor linked benchmark is internal in nature. They determine the actual lending rates by adding the elements spread to this tool. The banks, then, publish their MCLR after careful review. The same process applies for loans of different maturities - monthly or as per a pre-announced cycle. .The four main elements of MCLR are made up of the following:
a. Tenor premium (Note: This is a prescribed formula and banks cannot deviate from this formula) There is uniformity in the tenor period for all sorts of loans for the said residual tenor. This means that the tenor premium is not specific to a loan class or a borrower. b. Marginal cost of funds (Note: Cost will considered of new loans and new borrowings not old ones) The Marginal Cost of Borrowing is the average rate using which the deposits with similar maturities were raised during a specific time period before the review date. It will reflect in the bank's books by their outstanding balance. Marginal Cost of Borrowing has several components like the Return on Net Worth and the Marginal Cost of Borrowings Marginal Cost of Borrowings takes up 92% while the Return on Net worth accounts for 8%. This 8% is equivalent to the risk of weighted assets as denoted by the Tier I capital for banks
c. Operating Cost Operational expenses include cost of raising the funds, barring the costs recovered separately by means of service charges. It is, therefore, connected to providing the loan product as such. d. Negative carry on account of CRR Negative carry on the CRR (Cash Reserve Ratio) takes place when the return on the CRR balance is zero. Hence, when the actual return is less than the cost of the funds, there arises the negative carry. This will impact the mandatory Statutory Liquidity Ratio Balance (SLR)-reserve every commercial bank must maintain
How is MCLR different from Base Rate? MCLR is actually an improved version of plain vanilla base rate. It is a risk-based approach to determine the final lending rate for borrowers. It considers unique factors like marginal cost of funds instead of the overall cost of funds. Such marginal costs take into account repo rate, which did not form part of the base rate. While calculating MCLR, banks need to incorporate all other kinds of interest rates which they incur while mobilizing funds. Previously, the loan tenure was not at all an important factor. In case of MCLR, the banks should now include a tenor premium. This means they can charge a higher rate of interest for loans with long- term horizons.
Graduate in Economics. Gold medal in Dissertation, Prepared various documents on Demonetisation and GST, Share-trading and many more