Reserve Bank of India (RBI) has set a fixed internal reference rate for the banks. This rate of interest is, used by lending institutions and banks that come under the Reserve Bank of India to define the minimum rate of interest applicable to distinct loan kinds. Lenders are generally not permitted to lend funds at an interest rate below the reference rate known as MCLR. Read on to learn more about what MCLR is, its implementation and how it is distinct from the base rate.
What’s MCLR?
MCLR (Marginal cost of funds) refers to the minimum lending rate and below this, a bank is not allowed to lend. MCLR replaced the previous base rate system to decide the lending rates for commercial banks.
Reserve Bank of India (RBI) implemented MCLR on 1st April 2016 to determine the interest rates for loans. It is nothing but a reference rate for banks to decide the interest that they can charge on loans. For this, they usually take in account the incremental or additional cost of arranging an additional rupee for a prospective buyer. Below mentioned is the MCLR of the top two banks – Kotak MCLR Rate and IndusInd Bank MCLR.
MCLR (marginal cost of funds-based lending rate) – Kotak Mahindra Bank
MCLR with effect from 16th December 2022 for distinct tenures for Kotak Mahindra Bank is given below.
Kotak MCLR
| Tenure | Benchmark | Rate |
| 3 year | K-MCLR 3 Y | 9.05 per cent |
| 2 year | K-MCLR 2 Y | 8.85 per cent |
| 1 year | K-MCLR 1 Y | 8.65 per cent |
| 6 month | K-MCLR 6 M | 8.50 per cent |
| 3 month | K-MCLR 3 M | 8.30 per cent |
| 1 month | K-MCLR 1 M | 8.15 per cent |
| Overnight | K-MCLR o/n | 7.90 per cent |
MCLR (marginal cost of funds-based lending rate) – IndusInd Bank
The interest rates are effective from 22nd December 2022 onwards for different tenures for IndusInd Bank.
IndusInd Bank MCLR
| MCLR | Benchmark MCLR (percentage) |
| 3 year | 10.15 per cent |
| 2 year | 10.15 per cent |
| 1 year | 9.95 per cent |
| 6 month | 9.60 per cent |
| 3 month | 9.20 per cent |
| 1 month | 8.85 per cent |
| Overnight | 8.80 per cent |
MCLR implementation – outcome
Post the implementation of MCLR, the rate of interest is determined according to the relative risk constituent of an individual customer. Earlier, when the RBI lowered the repo rate, banks took extremely long to reflect the same in lending rates for borrowers.
As per the MCLR regime, banks tend to adjust the rate of interest as soon as there is a change in the repo rate. The implementation is aimed at ameliorating the openness in structure followed by banks to compute the rate of interest on advances.
How is MCLR computed?
MCLR is computed depending on the repayment tenure i.e., the amount of time you as a borrower take to repay the loan. It is a tenure-based benchmark and is internal in nature. The financial institution determines the actual rate of lending by including the element spread. Then, the financial institutions usually publish the MCLR after a thorough inspection. The same procedure applies for loans with distinct maturities – monthly according to the preannounced cycle.
4 major elements of MCLR that make this element up are –
Tenure premium
The lending cost differs from the loan period. The higher the loan duration, the higher would be the credit risk. To cover up the risk, the bank shifts this load to you as a borrower by levying an amount in form of a premium. This premium is called the tenure premium.
Marginal fund cost
Marginal fund cost is the average rate at which deposits with the same maturities are raised in the course of a particular period prior to the review data. This expense reflects in the books of a bank by their outstanding amount. Marginal fund cost has various components like return on net worth and borrowings on marginal cost. Marginal borrowing cost takes up 92 per cent while the return on the net worth will account for 8 per cent. The 8 per cent mark is equivalent to the risk of weighted assets which are denoted by Tier 1 capital for the banks.
Operating expense
Operating costs involve the expense of raising funds, and barring the expense recovered separately via service fees. It is, thus, connected to offering the loan product.
Negative carry-on account of the cash reserve ratio
A negative carry-on cash reserve ratio (CRR) takes place when the return on the CRR balance equals zero. A negative carry happens when the actual return is below the fund cost. This impact the SLR (statutory liquidity ratio balance) reserve of the commercial bank. It is a negative account because the bank cannot use the funds to earn income or gain interest on it.
How is MCLR distinct from the base rate?
MCLR is set by banks based on the structure and methodology adopted. To sum it up, borrowers can gain a lot from it. MCLR is just an ameliorated version of the base rate. This is a risk-based outlook to determine the final lending rate for you as a borrower. It factors in unique components like the marginal cost of funds in place of overall fund cost. It factors in unique parameters like marginal fund cost in place of overall fund cost.
Marginal cost factors in the repo rate, which does not form part of the base rate. When computing the MCLR, the banks tend to incorporate all types of rates of interest that they incur for mobilizing the funds. Previously, the loan repayment tenure was not considered when deciding the base interest rate. In the case of MCLR, banks are required to include it in the tenure premium. Doing so permits banks to levy higher interest rates for loans with a higher term period.
What are the important deadlines to disclose the monthly MCLR?
Banks come with the liberty to make available all the credit options under floating or fixed rates of interest. Moreover, banks require to follow a particular deadline to reveal the internal benchmark or MCLR. They can be 1-month, overnight MCLR, 3-months, 1-year, or other maturities as per the bank.
The lending rate cannot be less than MCLR for any maturities. However, these involve loans against the deposit, special loan schemes by the Indian government (Jan Dhan yojana), and fixed-interest rate loans with repayment tenures of over 3 years.
