Know about MCLR
The Reserve Bank of India has introduced a methodology of setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (MCLR) from 1st April 2016.
As per the guidelines by the RBI, banks have to prepare Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark lending rates. Based upon this MCLR, interest rate for different types of customers should be fixed in accordance with their riskiness.
The MCLR should be revised monthly by considering some factors including the repo rate and other borrowing rates. Specifically the repo rate and other borrowing rates that were not explicitly considered under the base rate system.
As per the guidelines, banks have to set benchmark rates for different tenure or time periods ranging from overnight (one day) rates to one year. Further banks will have an option of publishing MCLR of any other longer maturity.
The methodology uses the marginal cost or latest cost conditions reflected in the interest rate given by the banks for obtaining funds (from deposits and borrowing) while setting their lending rate. This means that the interest rate given by a bank for deposits and borrowing are the decisive factors in the calculation of MCLR.