Marginal Cost of Funds-based Lending Rates (MCLR)

Marginal Cost of Funds-based Lending Rates (MCLR)

Why in the news?

State Bank of India (SBI), India’s largest commercial bank, raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years, signaling that the soft rates regime that has prevailed since 2019 may be over.

Concept:

• MCLR,was instituted by the RBI with effect from April 1, 2016
• It is the lowest interest rate that a bank or lender can offer.
• It is applicable to fresh corporate loans and floating rate loans taken before October 2019

Impact:

As a result of the increase in MCLR, borrowers who have taken home, vehicle, and personal loans will find their equated monthly instalments (EMIs) rising in the coming months.

MCLR-linked loans had the largest share (53.1%) of the loan portfolio of banks as of December 2021.The rise in MCLR will cause resetting such loans at higher rates, due to the rise in WALR(weighted average lending rate) on outstanding rupee loans more than the policy repo rate cuts during the EBLR period.

Note: MCLR is one of the internal benchmark lending rate

External Benchmark Lending Rate-

To ensure complete transparency and standardization, RBI mandated the banks to adopt a uniform external benchmark within a loan category, effective 1st October, 2019. Unlike MCLR which was internal system for each bank, RBI has offered banks the options to choose from 4 external benchmarking mechanisms:

• The RBI repo rate
• The 91-day T-bill yield
• The 182-day T-bill yield
• Anny other benchmark market interest rate as developed by the Financial Benchmarks India Pvt. Ltd.