MCLR (Marginal cost lending Rate)

MCLR stands for marginal cost lending rate in Indian context which is applicable to a rate at which Bank lends money to its domestic customers w.e.f. 01-04-2016. This new system has been evolved by Reserve bank of India and instructed all scheduled commercial banks to charge a rate (plus or minus) with reference to MCLR. This has been done with a view to enhance transparency in lending rates and enabling better assessment of monitory policy of a bank as well as RBI.

Previously, banks were charging interest with reference to base Rate system, which was effective w.e.f. 2010. As per instructions of reserve bank of India

01)  It will be based on marginal cost of funds. In other words when ever any customer deposits their saving in banks under savings bank scheme or time deposit scheme, Banks incur cost by paying interest on the funds deposited and other overhead expenses, as decided by internal asset and liability management division of a bank.

02)  The actual rate will be decided by adding spread to this cost as bank need a minimum spread between net interest earned and net interest paid to keep bank profitable. This will be called MCLR.

03)  Tenor premium a premium to be charged by banks at higher rate for long term loans and lower rate for short period i. e 1 year should not be more than MCLR as it is inbuilt in specific period MCLR.

04)  Banks will be required to declare MCLR by 10^th of every quarter. Some banks have started quoting it on monthly basis.

05)  As such banks have been asked to declare 7 bench mark rates depending upon period of loan. i.e overnight MCLR, one month MCLR, three month MCLR, six month MCLR, one year MCLR, three year MCLR and a Five year MCLR.

06)  Certain schematic finances have been exempted from the purview of MCLR. These are

I)                 Loans under govt. schemes

II)               Concessional loan granted under restructuring and rehabilitation of sick units as working capital term loan and funded interest term loans.

III)             Advances to staff and retired staff and loans granted to depositors against their fixed deposits.