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MCLR Marginal Cost of Funds based Lending Rate (MCLR). Reserve Bank of India (RBI) vide their notification RBI/2015-16/273 DBR. No. Dir. BC.67/13.03.00/ 2015-16 dated 17th December 2015 introduced Marginal Cost of Funds based Lending Rate (MCLR) w.e.f. 01.04.2016. Marginal cost of funds based lending rate (MCLR) is the rate below which the bank will not sanction loans in a particular maturity except the loans which are exempted from being linked to MCLR as reference rate for pricing interest. a) Internal Benchmark i. All loans sanctioned and credit limits renewed in INR (Indian Rupee) wef. April 1, 2016 are priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark for such purposes. ii. The MCLR comprise of: a. Marginal cost of funds; b. Negative carry on account of CRR; c. Operating costs; d. Tenor premium. iii. Marginal Cost of funds The marginal cost of funds comprise of Marginal cost of borrowings and return on net worth. Marginal cost of funds = 92% x Marginal cost of borrowings + 8% x Return on networth iv. Negative Carry on CRR Negative carry on the compulsory CRR which arises due to return on CRR balances being nil, will be calculated as under: Required CRR x (marginal cost) / (1- CRR) Thus marginal cost of funds is used for computing negative carry on CRR. v. Operating Costs All operating costs concerned with providing the loan which includes cost of raising funds are included under this head. It is to be ensured that the costs of providing those services which are separately recovered by way of service charges does not fall under this component. vi. Tenor premium These are the costs that arise from loan commitments that are for longer tenor. The tenor premium will be same for all types of loans for a given residual tenor. That is to say that the change in tenor premium should not be borrower specific or loan class specific. vii. As MCLR is a tenor linked benchmark, banks should arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of Marginal cost of funds, Negative carry on account of CRR and Operating cost. viii. Accordingly, all banks shall publish their internal benchmark for the following maturities: a. overnight MCLR, b. 1-month MCLR, c. 3-month MCLR, d. 6-month MCLR, e. One year MCLR. Banks also have the choice of publishing MCLR of any other longer maturity. b) Spread i. Banks should have a Board approved policy reflecting the components of spread charged to a customer. The policy shall include principles: a. To ascertain the quantum of each component of spread. b. To ascertain the range of spread for a given category of borrower / type of loan. c. To delegate powers in respect of loan pricing. ii. For the sake of uniformity in these components, all banks shall adopt the following broad components of spread: a. Business strategy The component is arrived at taking into account the business strategy, market competition, embedded options in the loan product, market liquidity of the loan etc. b. Credit risk premium The credit risk premium charged to the customer representing the default risk arising from loan sanctioned should be arrived at based on an appropriate credit risk Rating / scoring model and after taking into consideration customer relationship, expected losses, collaterals, etc. iii. The spread charged to an existing borrower should not be increased except on account of deterioration in the credit risk profile of the customer. Any such decision to effect a change in spread on account of change in credit risk profile should be supported by a complete in all respect risk profile review of the customer. iv. The stipulation contained in sub-paragraph (iii) above is, however, not applicable to loans under consortium / multiple banking arrangements. c) Interest Rates on Loans i. Final lending rates will be determined by adding the components of spread to the MCLR. Hence, there will be no lending below the MCLR of a particular maturity for all loans connected to that benchmark ii. The reference benchmark rate used for charging the loans should there be in the sanction terms of the loan contract. d) Exemptions from MCLR i. Loans covered by government sponsored schemes specially formulated by Government of India wherein banks have to do pricing of loans as per the scheme, are exempted from being linked to MCLR as the benchmark for arriving at the interest rate. ii. Working Capital Term Loans (WCTL), Funded Interest Term Loans (FITL), etc. That are granted under the rectification/restructuring package. iii. Loans sanctioned under various refinance schemes formulated by Government of India or any Government Undertakings wherein banks charge interest at the rates prescribed under the schemes to the extent refinance is available. Interest rate charged on the amount of loan not covered under refinance should adhere to the MCLR guidelines. iv. The following loans can also be exempted from being linked to MCLR as the benchmark for computing interest rate: (a) Advances to banks’ depositors against their own deposits. (b) Advances to banks’ own staff including retired staff. (c) Advances granted to the Chief Executive Officer / Whole Time Directors. (d) Loans linked to some market determined external benchmark. (e) Fixed rate loans granted by banks. However, in case of hybrid loans in which the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines. e) Review of MCLR i. Banks review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month on a pre-announced date with the approval of the Board or any other committee to which such powers being delegated. ii. Initially banks which do not have adequate systems to carry out the review of MCLR on a monthly basis, could review their rates once a quarter on a pre-announced date for the first one year i.e. up to March 31, 2017. Thereafter, such banks should adhere to the monthly review of MCLR as mentioned above. f) Reset of interest rates i. Banks may specify interest reset dates on their floating rate loans. Banks will have the option to offer loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of review of MCLR. ii. The Marginal Cost of Funds based Lending Rate (MCLR) as on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim. iii. The frequency of reset shall be one year or lesser. The exact frequency of reset shall form part of the terms of the loan contract. g) Treatment of interest rates linked to Base Rate charged to existing borrowers i. Existing loans and credit limits linked to the Base Rate may continue till repayment or renewal, as the case may be. ii. Banks will continue to review and publish Base Rate also. iii. All existing borrowers will also have the option to switch to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms. However, this should not be taken as a foreclosure of existing facility. h) Effective date of these guidelines is April 1, 2016.

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Marginal Cost of Funds based Lending Rate (MCLR)

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