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MCLR Rates - Shanmugam IAS academy in coimbatore
MCLR Rates


What’s in news?

India’s biggest lender State Bank of India or SBI has reduced its MCLR (Marginal Cost of Funds based Lending Rate) by 10 basis points. 

Key data:

  • SBI also lowered its fixed deposit or FD rates by 20-25 basis points.
  • The move will benefit all the existing SBI customers having home, auto and any other category of loans that are linked to the marginal cost of fund-based lending rate (MCLR).
  • The rate cut is aimed at boosting loan demand in this festive season.
  • This is the fifth rate cut by the SBI this financial year.
  • The bank has cut its MCLR by 40 bps since April.

Marginal Cost of Funds based Lending Rate (MCLR):

  • The marginal cost of funds-based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI.
  • This new methodology replaces the base rate system
  • Based upon MCLR, interest rate for different types of customers will be fixed in accordance with their riskiness.
  • The interest rate given by a bank for deposits and the repo rate are the decisive factors in the calculation of MCLR.

Reasons for introducing MCLR:

  • Banks were slightly slow to change their interest rate in accordance with repo rate change by the RBI.
  • Rates based on marginal cost of funds are more sensitive to changes in the policy rates
  • This is very essential for the effective implementation of monetary policy.
  • To improve the transmission of policy rates into the lending rates of banks.
  • To bring transparency in the methodology followed by banks for determining interest rates on advances.
  • To ensure availability of bank credit at interest rates which are fair to borrowers as well as banks.
  • To enable banks to become more competitive and enhance their long run value and contribution to economic growth.

How MCLR is different from base rate?

  • Under the base rate system, banks were changing the base rate, only occasionally.
  • Banks waited for long time or waited for large repo cuts to bring corresponding reduction in their base rate.
  • Under base rate, the cost is calculated on an average basis by simply averaging the interest rate incurred for deposits.
  • The requirement that MCLR should be revised monthly makes the MCLR very dynamic compared to the base rate.
  • Under MCLR:

a) Costs that the bank is incurring to get funds (means deposit) is calculated on a marginal basis

b) The marginal costs include Repo rate; whereas this was not included under the base rate.

c) Many other interest rates usually incurred by banks when mobilizing funds also to be carefully considered by banks when calculating the costs.


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