Marginal Cost Based Lending Rate (MCLR): A Study on the New Regime of Lending Rate Pattern of the Banking Operations in India

Abstract

Marginal cost of fund based lending rate (MCLR) is referred as an internal benchmark rate at which the banks can lend to its customers, introduced by Reserve Bank of India (RBI) with effect from 1st April, 2016, charging different rates on the basis of different factors relating to a loan such as marginal cost of funds, Negative carry on account of Cash reserve ratio, operating cost, tenor premium. Banks shall publish internal benchmarks for time period from overnight to one year. Banks shall have the advantage to decide the external benchmark rate related to market determined external factors. Existing loan customers based on BPLR system will be provided the option to switch their loans on the basis of their will and no switching charge is to be applied. MCLR may be considered a double edged sword as referred to the base rate system which was a single edge sword to harm customers as the banks were slowly adopting decreases in base rate and quickly transmitting high interest rate to the customer. MCLR is more of a competitive rate in respect to previous rates as it considers marginal cost of procurement of funds as the banks reach efficiency rates are to be diminished keeping base rate in mind.