Full Form of MCLR
The full form of MCLR is “Marginal Cost of Funds based Lending Rate”. This rate is the minimum rate of interest at which the bank can lend money. Customers won’t usually know the MCLR, as it is an internal standard and is directly related to tenor. This means that the bank directly decides the interest rates on the loan based on the time duration left to repay it.
Apart from learning the full form of MCLR, here are some quick facts you need to know.
Calculation of Tenor
MCLR is calculated by taking into account the following four components
- Tenor Premium
Tenor is the banking terminology used to describe the tenure of a loan. This premium is directly determined by the period during which any borrower would have to repay the loan. (Tenor premium is only linked to the tenure, and not the borrower - i.e., the tenor premium is not borrower-specific)
- Marginal Cost Of Funds
This relates to a business’s financial cost increase when additional funding is raised via a new method. This is also based on the tenor but also takes into account the borrower.
- Operating Costs
When a loan is sanctioned, the bank has to undertake certain operational costs, including the expenses involved in raising the money required to fund the loan. This does not include the costs which are taken into consideration at the time of calculating service fees.
- Negative Carry on Account of CRR (Cash Reserve Ratio)
When the project’s actual return is less than the fund’s cost, the situation is called Negative Carry on Account of CRR. This will directly impact the Statutory Liquidity Ratio maintained by each commercial bank and directly affects the MCLR.
Benefits of MCLR
Since the introduction of MCLR in 2016, the borrowers have had significant advantages to benefit from the RBI’s rate cut. With the introduction of MCLR, we have seen:
- An increase in transparency in banks and other financial institutions while determining the rates of interest.
- The benefits of the RBI rate cuts have been passed on to the end customers and borrowers as soon as possible.
- Regulates and brings the element of fairness and availability of funds to both customers and lenders.
- Banks are now required to declare the interest rates of their overnight loans, one-month loans, 3-month loans, 6-month loans 1-year loans, and 2-year loans every month. This makes it easier for customers and borrowers to be as informed and educated as possible before using these loans.
We hope this information was useful to you. Like the full form of MCLR, you can learn from others our articles. This would be extremely beneficial for a banking exam.
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