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MCLR: Marginal Cost of funds based Lending Rate

The full form of MCLR is “Marginal Cost of funds based Lending Rate“. MCLR is the minimum loan rate below which a bank cannot lend, except in some cases. It is a methodology introduced by the Reserve Bank of India (RBI) on April 1, 2016 to define the interest rate for commercial bank loans. It replaced the old base rate system method, which was introduced in July 2010 to determine lending rates for commercial banks. Floating rate loans are tied to the MCLR rate from April 1, 2016. Home loans and loans against property schemes are generally floating rate loans and are compared to MCLR rates. The basic objective of the MCLR is to pass on the benefit of changes in interest rates to the ultimate borrower.

The marginal cost of funds based lending rate (MCLR) is based on four components: the marginal cost of funds, the tenor premium, operating expenses and the cash reserve ratio (CRR). The term is the amount of time a borrower has to repay the loan. The tenor premium is the same for all types of loans. The marginal cost of funds refers to the increase in financial costs for a commercial entity when another rupee increases with the new financing. Operating expenses include the cost of raising funds, but do not take into account costs that are separately recovered through service charges. CRR occurs when the actual return is less than the cost of the funds. This will affect the required balance of the Statutory Liquidity Ratio (SLR) that all commercial banks must maintain.

Other full forms of MCLR