MCLR Full Form | Full Form of MCLR

MCLR Full Form - Marginal Cost of Funds based Lending Rate

  • Here, you’ll get the solution of following MCLR related questions: full form of MCLR , full form of MCLR in banking , what is the full form of MCLR
 Marginal Cost of Funds Based Lending Rate

Marginal Cost of Funds Based Lending Rate

  • MCLR stands for Marginal Cost of Funds based Lending Rate.
  • It's the minimum lending rate below which a bank isn't allowed to lend, except in some cases.
  • It is the tactic by which the minimum rate of interest for loans is decided by a bank supported the incremental cost.
  • The MCLR method for fixing interest rates for advances was introduced by the Federal Reserve Bank of India with effect from 1 April 2016.
  • It's replaced the old method of interest rate system, which was introduced in July 2010 to work out the lending rates for commercial banks.
  • It had been implemented on 1 April 2016 by RNI to work out rates of interest for loans.

MCLR is predicated on four components: The incremental cost of funds, Tenor premium, Operating expenses, and Cash Reserve Ratio (CRR).

 Four Components of Marginal Cost of Funds Based Lending Rate

Four Components of Marginal Cost of Funds Based Lending Rate

  • Tenor premium :
    • Tenor is that the amount of your time a borrower has to repay the loan. The tenor premium is that the same for all kinds of loans, i.e., it's not borrower-specific.
  • The incremental cost of funds :
    • The incremental cost of funds refers to the rise in financial costs for a business entity when another rupee is increased of latest funding. MCLR is calculated on the idea of loan tenor.
  • Operating cost :
    • It's linked with providing the loan product, which incorporates the value of raising funds, but doesn't take into account the prices which are separately recovered through service charges.
  • Negative keep it up account of CRR (Cash Reserve Ratio):
    • It takes place when the return on the CRR balance is zero. It occurs when the particular return is a smaller amount than the value of the funds. It’ll affect the specified Statutory Liquidity Ratio (SLR) Balance that each full service bank is required to maintain.

Prior to the MCLR system, the various banks were using different methodologies for calculation of base-rate/minimum rate like based on the typical cost of funds or incremental cost of funds or blended cost of funds.

Reasons for Introducing MCLR

  • To improve the lending rates of banks.
  • To bring transparency in determining interest rates on advances by banks.
  • To make bank credit available at interest rates which are fair to borrowers and banks
  • To assist banks in becoming more competitive and improve their long-run value and contribution to economic process.

Related Searches to MCLR Full Form | Full Form of MCLR