MCLR

 

MCLR means Marginal Cost of Fund BasedLending Rate

MCLR is calculated based on the loan tenor, ie, the amount of time a borrower has to repay the loan . This tenor-linked benchmark is internal in nature. The bank determines the actual lending rates by adding the elements spread to this tool. The banks, then, publish their MCLR after careful inspection

Banks typically benchmark their home loan rates to their one-year MCLR. MCLRs are subject to revisions. In an increasing interest rate scenario such as now, the costs of funds go up. This increases the MCLR, which increases loan rates, making them costlier

MCLR is based on incremental/marginal cost of funds. Base rate is calculated by considering profit margin or minimum rate of return. MCLR is calculated considering tenor premium. 

Marginal Cost of Funds based Lending Rate (MCLR)

1. The guidelines specify that MCLR calculated using methodology prescribed shall correspond to the tenor of funds in the single largest maturity bucket provided it is more than 30% of the entire funds reckoned for determining the MCLR. But my bank does not have a single time bucket which has more than 30% share of the funds reckoned for MCLR. In such a case, the MCLR calculated as per the methodology indicated shall correspond to which tenor? Let's assume a bank has the following maturity profile of borrowings: Sr. No. Original Maturity Balance outstanding as a percentage of total funds (other than equity) Cumulative weightage 1 5 years & above 15.1% 15.1% 2 3 years & above but less than 5 years 11.8% 26.9% 3 2 years & above but less than 3 years 9.3% 36.2% 4 1 year & above but less than 2 years 16.9% 53.1% 5 6 months & above but less than 1 year 24.3% 77.4% 6 91 days & above but less than 6 months 10.5% 87.9% 7 Up to 90 days 12.1% 100%   Total 100%   In this case, the MCLR shall correspond to the weighted average of tenor of the first three time buckets. 2. Whether the tenor premium charged will be for contractual tenor or residual tenor? Since floating rate loans are subject to periodic resets, the tenor premium will be the appropriate premium for the residual period up to the next reset date. 3. What will be the denominator used for arriving at the operating cost for computing MCLR? Banks may calculate all operating costs as a percentage of marginal cost of funds for computing MCLR. 4. Clarify the definition of short term borrowings. A short term borrowing means borrowing of tenor up to but less than one year. 5. Can components of spread be negative? The components of the spread ie business strategy and Credit risk premium shall have either a positive value or be zero. In other words, the spread components cannot be negative. 6. Banks grant fixed rate loans to long term projects where initial debt facility consists of loan for a medium term say 5 to 7 years. These loans are then refinanced after the specified period. Will these types of loans be permitted under MCLR system? Banks can grant fixed rate loans to long term projects wherein the interest rate is fixed until the loan is due for refinancing. The loan, at the time of refinancing, will be treated as a fresh fixed rate loan with a maturity period equal to the period up to the next date of refinancing. Such fixed rate loans will fall under the directions contained in Section 13(d)(v) of Reserve Bank of India (Interest Rate on Advances) Directions, 2016. 7. Will the interest rates on fixed rate loans (or fixed portion of hybrid loans) be based on the date of sanction or disbursement? The interest charged on fixed rate loans as well as the fixed portion of hybrid loans will be the interest rate mentioned in the sanction letter. It stands for Marginal cost of funds based leading rate. So it a lending rate or a standard lending rate below which a bank is not allowed to give loans except some priority sectors. This lending rate is different from bank to bank as it depends on four factors. 1: Marginal cost of funds 2: Negative carry on account CRR 3: Operating cost 4: Tenure of loan And these factors are different from bank to bank. Let's understand each factor a bit in a view to have better idea of what MCLR is. 1: Marginal cost of funds It depends on 3 factors I: Interest given by banks to its customers 2: REPO rate decided by RBI 3: Return on capital invested Weights are assigned in a ratio of 92:8 that is first two as a combination will hold a weight of 92 with the 3rd one. So basically it is the cost incurred by bank in order to arrange fund. And banks arrange funds from 3 sources. One is from RBI through REPO. second is from public as deposits and third is from the returns of investment made. For example I am depositing 100 rupees with bank in my savings account. And bank have to give me at 4% per annum. Like that banks will give certain interest to its fixed, recurring and bulk account holder like 7%,8%,10% And for current account there is no interest. So cost of fund average of all interests. That is total interest given by total fund deposited expressed in percentage. Like wise banks are paying interest to RBI for funds under REPO. And same for investment made. 2: Negative carry on account of CRR. There is a long debate going over CRR because banks terms this as the biggest Non performing asset(NPA) which yields nothing. Where SLR does yield at least the minimum. So the term negative carry on account of CRR arised There are certain technicalities while deriving that rate and on the explanation of why this is negative. In simple words when a depositer deposits 100 rupees bank gives him 4% on 100 rupees. But bank gets nothing on CRR which is 4% and gets very less percentage on SLR which is 21.5% l. That means banks are at a loss on 25.5% of the amount deposited. So while leading they have to recover that much. So this term is included 3: Operating cost This is the cost incurred by bank in order to perform day to day operations. 4: Tenure of loan: RBI have asked banks to derive 5 lending rates that is on overnight basis, one day basis, one month, six month and one year This is because RBI wants the real cost to arrange fund for 1 year must be included while giving loan for 1 year. For example If a person is taking loan in February for one year term then he will pay little more interest than the interest rate what banks pays to a depositer in February. Not before and not after. And MCLR will be revised in monthly basis as a result true cost to banks to arrange funds will be reflected. How borrowers are going to be affected ? The impact will be on home loan borrowers mostly. Because they will be on floating rate of interest regime where they will have a new interest every year. Once someone avail a home loan then he will be sticking to that rate for a year untill new MCLR takes over. In case new MCLR becomes less than the previous one than then the borrower will have to pay for less tenure say 14 years instead of 15 years. Because in EMI system one have to pay exactly same amount. As servicing amouny can't be reduced then tenure will be reduced.