The Marginal Cost of funds based lending rate refers to the minimum interest rate of a bank below which it cannot lend except in some cases allowed by RBI. Its is an internal benchmark or reference rate for the bank. It’s actually describe , the method by which the minimum rate for loans is determined by a bank on the basis of marginal cost or the additional cost of arranging one more rupee to the prospective borrower.
The MLCR is for fixing interest rates for advances was introduced by the Reserve bank Of India from April 1, 2016. This methodology replace the base rate system introduced in July 2010.
The MNCs should we revise multiple phone setting something factors including the repo rate and the borrowing rates. Specifically the repo rate and other borrowing rate that were network not explicitly considered under the base rate system.
The bank are slightly slow to change their interest rate in accordance with repo rate change by the RBI. Whenever the RBI is changing the repo rate , it was verbally comparing banks to make changes in their lending rates. The purpose of changing the report is realised only if the banks are changing their individual lending and deposit rates
• The base rate system does not incorporate the repo rate in its calculation. So , any change in repo rate does not reflect directly in the interest rate proposed by banks.
• The MNC depends on the marginal cost of funds to a large extent. The repo rate is a big factor in the calculation the marginal cost of funds. So, any change in the repo rate brings a major change in the marginal cost of funds. This forces banks to change MLCR right away.
• Advances in all cases by adding , the components of spread to the MCLR. Fixed rates loans up to 3 years are also priced with reference to MCLR.
However , certain loans linked fix rates loan of tenor above 3 years , special loan schemes formulated by government of India , advances to bank depositor against their own deposits. Advances to banks own employees etc. Are not linked to MCLR.