Marginal Cost of Funds based Lending Rate (MCLR)

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    • Recently, the State Bank of India, Bank of Baroda and Indian Overseas Bank raised their marginal cost of fund-based lending rates (MCLR) by up to 15 basis points.

    Marginal Cost of Funds-Based Lending Rate

    • It was instituted by RBI with effect from April 1, 2016. It replaced the base rate structure, which had been in place since July 2010.
    • It is the lowest interest rate that a bank or lender can offer. The final rate of lending also includes risk premium and spreads charged by banks.
    • It is applicable to fresh corporate loans and floating rate loans taken before October 2019. 
      • RBI had then switched to the external benchmark linked lending rate (EBLR) system where the lending rate is linked to benchmark rates like repo or Treasury Bill rates.
    • Aims and objectives
      • 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 the 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.

    Source:IE