Reference:
With the RBI hiking the repo rate by 35 basis points to 6.25 recently, several banks have raised their marginal cost of funds-based lending rate (MCLR) and external benchmark linked rates (EBLR) on loans.
Basic Concepts of MCLR:
- What is MCLR?
- It is the minimum interest rate that a bank can lend at.
- How MCLR is determined?
- 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.
- How MCLR is calculated?
- MCLR is closely linked to the actual deposit rates.
- It is calculated based on 4 components –
- Marginal cost of funds
- Negative carry on account of Cash Reserve Ratio
- Operating Costs
- Tenor premium (*Tenor is the amount of time left for repayment of the loan)
- What type of loans are offered?
- Under the MCLR regime, banks are free to offer all categories of loans on fixed or floating interest rates.
- When was MCLR introduced?
- MCLR was introduced from 1 April 2016 which replaced the base rate structure.
- What is the difference between MCLR and Base Rate?
- MCLR is an advanced version of the base rate.
- The base rate uses the average finance cost, but MCLR is based on the marginal or incremental cost of money.
- When calculating the base rate, a minimum rate of return/profit margin is used, whereas, for MCLR, banks are required to include tenor premium into the calculation.
- What impact does an increase in MCLR have?
- Rise in equated monthly instalments (EMIs).
- Crowding out of potential loan seekers due to higher interest rates.
- Deposit rates are likely to “increase meaningfully”.
Other Key Terminologies:
- Repo Rate –
- It is the rate at which the central bank of a country (RBI) lends money to commercial banks in the event of any shortfall of funds.
- Reverse Repo Rate –
- It is the rate at which the central bank of a country (RBI) borrows money from commercial banks within the country.
- Standing Deposit Facility –
- It allows banks to park their excess funds at a higher rate but without taking any collateral from the central bank.
- Internal Benchmark Lending Rate (IBLR) –
- These are a set of reference lending rates which are calculated after considering factors like the bank’s current financial overview, deposits and non-performing assets (NPAs) etc. Example: Base rate, MCLR etc.
- External Benchmark Lending Rate (EBLR) –
- Under this, lending rate is linked to a benchmark rate.
- 4 external benchmarking mechanisms:
- RBI repo rate
- 91-day Treasury-bill yield
- 182-day Treasury-bill yield
- Any other benchmark market interest rate as developed by the Financial Benchmarks India Pvt. Ltd.
Knowledge ‘+’
Higher the duration of the loan, higher will be the risk. Thus banks charge a higher rate of interest for long-term loans.
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)
- Cut and optimize the Statutory Liquidity Ratio
- Increase the Marginal Standing Facility Rate
- Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
- 1 and 2 only
- 2 only
- 1 and 3 only
- 1, 2 and 3
Reference: Indian Express
