What is MCLR – The basics and how it is calculated

If you are aware of the world of lending, you may know about the MCLR.

If not, then going through this quick post will help you learn more.

Continue reading!

What is MCLR?

MCLR stands for Marginal Cost of Funds based Lending Rate. The MCLR rate is the minimum rate of lending. Below which a financial institution is not allowed to lend. The Reserve Bank of India (RBI) may authorize it in rare cases.

The Marginal Cost of Funds based Lending Rate replaced the earlier system to gauge commercial bank’s lending rates. The MCLR was launched by the RBI on 1 April 2016. It was done to determine the interest rate for loans.

The MCLR rate is an internal reference for financial institutions to determine the rate of interest they can charge for loans. To do that, they consider the incremental or extra cost of arranging extra money for a buyer.

How to calculate MCLR?

Marginal Cost of Funds based Lending Rate gets calculated on the tenor of the loan. The tenor based benchmark is considered to be internal.

It is a bank that determines the actual rate of lending. They do that by adding aspects spread to the tool.

In turn, banks publish their MCLR after proper inspection. The same procedure applies for loans having different maturities – monthly or as per a pre-determined cycle.

The four major elements of the MCLR rate comprises the tenor premium, the marginal cost of funds, the cost of operation and negative carry on CRR account. CRR stands for Cash Reserve Ratio.

The MCLR rate is a revamped version of the base rate, and borrowers are able to avail of benefits in changes made to it.

Read Also: What is MCLR and How is it Different from Base Rate?