MCLR – Marginal Cost of Funds based Lending Rate:
The Full form of MCLR is the Marginal Cost of Funds based Lending Rate, which is referred to as the lowest interest rate, offered by a bank or lender. Meanwhile, most banks cannot afford this interest rate lower offer than the marginal cost of a funds-based lending rate, this happens when the Reserved Bank of India (RBI) allowed for certain expectations. The Marginal Cost of Funds based Lending Rate methodology came into existence in the Indian financial system by the Reserved Bank of India in the year 2016.
Purpose of MCLR:
Marginal Cost of Funds based Lending Rate (MCLR) enhances the transmission of policy rates into the lending rates of banks. These guidelines help to ensure the availability of bank credit at interest rates that are useful to the customers as well as the bank. This leads to long-run value and contribution to the economic growth of the bank.
RBI Guidelines about MCLR:
Here we see the Guidelines Offered by the Reserve Bank of India to MCLR.
- The fixed home loan will not be affected by MCLR.
- For different tenors, the bank must publish the marginal cost of the funds-based lending rate.
- Calculation of marginal cost of funds, while depositing balance or some other loan borrowings are considered.
- The floating rate home loan will remain the same till the next reset date from the MCLR date of sanction date.
Conclusion:
The MCLR system has replaced the base rate system that came into existence in the year 2010, thus renewal of credit limits and sanctioning of loans are undergoing the process and done as per MCLR rules and conditions. On the other hand, the minimum interest rate offered by the bank to their customers is called the Base rate.