What is the Effect of MCLR on the Economy?

Banks need to follow certain standard procedures taking into account all the parameters related to liquidity, assets, liability, etc., to arrive at the rate of interest for loans. In addition, they also need to adhere to the RBI guidelines for charging interest rates. It is in this regard that MCLR works as a linkage for banks to adjust their rates in accordance with the bi-monthly policy rates formulated by RBI.

MCLR (Marginal Cost of Funds based Lending Rate) is the internal benchmark for banks to calculate the interest rate they can charge on different types of loans.

MCLR came into force on 1stof April 2016, but the significance is more towards the period than the exact date. The introduction of MCLR marks the period when changing the policy rates did not drive the banks to make corresponding changes in their interest rates. Therefore, in order to provide the complete benefit of policy rates changes to the consumers, MCLR was introduced.

The banking system in India has penetrated the far-flung corners of our country. Thus, it is imperative that the benefits of the monetary policy must be passed on to every end consumer. With MCLR in place, the same is possible in a very systematic manner, thereby boosting the borrowers’ confidence. The enhancement in the transparency due to the factors used to calculate the MCLR also encourages borrower’s sentiment resulting in a higher demand for credit. In addition, it helps borrowers get loans swiftly from banks.

1. Tenor Premium: This takes into account the time period of the loan
2. The Marginal Cost of Funds: This includes the average rate of raising the deposits having similar maturity periods within a specified date.
3. Operating Cost: As the name suggests, it covers all the operational expenses incurred by banks for providing a loan.
4. Negative Carry on Account of CRR: Negative carry on the Cash Reserve Ratio or CRR comes into picture when the earning on the CRR balance is zero.

So, if you want to know the MCLR rate for your bank, you can check their official websites. As per the RBI guidelines, it is mandatory for banks to publish their MCLR rates on a monthly basis.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.