Marginal Cost of fund-based Lending Rate (MCLR)

IN NEWS:

• State Bank of India, the country’s largest lender, has reduced the Marginal Cost of fund-based Lending Rate (MCLR) by 35 basis points (bps) across all loan tenures.

WHAT IS MCLR?

• MCLR is the minimum interest rate that a bank can lend at, except in some cases allowed by the RBI.
• The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016, replacing the ‘base rate’ structure. Bank cannot lend at a rate lower than MCLR of a particular maturity, for all loans linked to that benchmark.
• MCLR is a tenor-linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan.
• MCLR is largely determined by marginal cost of fund, deposit rates and repo rates. Banks will review and publish their MCLR of different maturities, every month, on a pre-announced date
• RBI decided to shift from base rate to MCLR because the rates based on marginal cost of funds are more sensitive to changes in the policy rates.

PRELIMS QUESTION:

Q. Consider the following statements regarding Marginal Cost of fund-based Lending Rate (MCLR):

1. It is the minimum interest rate at which banks can lend loans

2. It is determined by the RBI on a monthly basis

Choose the correct statements from the codes given below:   

a. 1 only

b. 2 only

c. Both 1 and 2

d. Neither 1 nor 2

Answer to Prelims question