MCLR\n\n\n\nMarginal Cost of\nFunds based Lending Rate (MCLR).\n\n\n\nReserve Bank of India (RBI) vide their\nnotification RBI\/2015-16\/273 DBR. No. Dir. BC.67\/13.03.00\/ 2015-16 dated 17th\nDecember 2015 introduced Marginal Cost of Funds based Lending Rate (MCLR)\nw.e.f. 01.04.2016. Marginal cost of funds based lending rate (MCLR) is the rate below which the\nbank will not sanction loans in a particular maturity except the loans which\nare exempted from being linked to MCLR as reference rate for pricing\ninterest.\n\n\n\na)\nInternal Benchmark \n\ni.\nAll loans sanctioned and credit limits renewed in INR (Indian Rupee) wef. April\n1, 2016 are priced with reference to the Marginal Cost of Funds based\nLending Rate (MCLR) which is the internal benchmark for such purposes. \n\nii. The\nMCLR comprise of:\n\n\n\na.\nMarginal cost of funds; \n\nb.\nNegative carry on account of CRR; \n\nc.\nOperating costs; \n\nd.\nTenor premium. \n\n\n\niii. Marginal\nCost of funds \n\n\n\nThe marginal cost of\nfunds comprise of Marginal cost of borrowings and return on net worth. \n\n\n\n \n\n \nMarginal cost of\n funds = 92% x Marginal cost of borrowings + 8% x\n\nReturn on\n networth \n\n \n\n\n\n\n\n\niv. Negative\nCarry on CRR \n\n\n\nNegative carry on the\ncompulsory CRR which arises due to return on CRR balances being nil, will be\ncalculated as under:\n\n\n\nRequired CRR x (marginal cost) \/ (1-\nCRR) \n\n\n\nThus marginal cost of\nfunds is used for computing negative carry on CRR. \n\n\n\nv. Operating\nCosts \n\n\n\nAll operating costs\nconcerned with providing the loan which includes cost of raising funds are included\nunder this head. It is to be ensured that the costs of providing those services\nwhich are separately recovered by way of service charges does not fall under\nthis component. \n\n\n\nvi. Tenor\npremium \n\n\n\nThese are the costs that\narise from loan commitments that are for longer tenor. The tenor premium will\nbe same for all types of loans for a given residual tenor. That is to say that\nthe change in tenor premium should not be borrower specific or loan class\nspecific.\n\n\n\nvii.\nAs MCLR is a tenor linked benchmark, banks should arrive at the MCLR of a\nparticular maturity by adding the corresponding tenor premium to the sum of\nMarginal cost of funds, Negative carry on account of CRR and Operating cost. \n\nviii.\nAccordingly, all banks shall publish their internal benchmark for the following\nmaturities: \n\n\n\na. overnight MCLR, \n\nb. 1-month MCLR, \n\nc. 3-month MCLR, \n\nd. 6-month MCLR, \n\ne. One year MCLR.\n\n\n\n\nBanks\nalso have the choice of publishing MCLR of any other longer maturity.\n\n\n\nb)\nSpread \n\ni.\nBanks should have a Board approved policy reflecting the components of spread\ncharged to a customer. The policy shall include principles:\n\n\n\na.\nTo ascertain the quantum of each component of spread. \n\n\n\nb.\nTo ascertain the range of spread for a given category of borrower \/ type of\nloan. \n\nc.\nTo delegate powers in respect of loan pricing. \n\n\n\nii.\nFor the sake of uniformity in these components, all banks shall adopt the\nfollowing broad components of spread: \n\na. Business strategy \n\n\n\nThe component is\narrived at taking into account the business strategy, market competition,\nembedded options in the loan product, market liquidity of the loan etc.\n\n\n\nb. Credit risk\npremium\n\n\n\nThe credit risk\npremium charged to the customer representing the default risk arising from loan\nsanctioned should be arrived at based on an appropriate credit risk\n\nRating \/ scoring\nmodel and after taking into consideration customer relationship, expected losses,\ncollaterals, etc. \n\n\n\niii.\nThe spread charged to an existing borrower should not be increased except on\naccount of deterioration in the credit risk profile of the customer. Any such\ndecision to effect a change in spread on account of change in credit risk profile\nshould be supported by a complete in all respect risk profile review of the\ncustomer. \n\niv.\nThe stipulation contained in sub-paragraph (iii) above is, however, not\napplicable to loans under consortium \/ multiple banking arrangements. \n\nc)\nInterest Rates on Loans \n\ni.\nFinal lending rates will be determined by adding the components of spread to\nthe MCLR. Hence, there will be no lending below the MCLR of a particular\nmaturity for all loans connected to that benchmark ii. The reference benchmark\nrate used for charging the loans should there be in the sanction terms of the\nloan contract. \n\nd)\nExemptions from MCLR \n\ni.\nLoans covered by government sponsored schemes specially formulated by\nGovernment of India wherein banks have to do pricing of loans as per the\nscheme, are exempted from being linked to MCLR as the benchmark for arriving at\nthe interest rate. \n\nii.\nWorking Capital Term Loans (WCTL), Funded Interest Term Loans (FITL), etc. That\nare granted under the rectification\/restructuring package.\n\n\n\niii.\nLoans sanctioned under various refinance schemes formulated by Government of\nIndia or any Government Undertakings wherein banks charge interest at the rates\nprescribed under the schemes to the extent refinance is available. Interest\nrate charged on the amount of loan not covered under refinance should adhere to\nthe MCLR guidelines. \n\niv.\nThe following loans can also be exempted from being linked to MCLR as the\nbenchmark for computing interest rate: \n\n\n\n(a)\nAdvances to banks\u2019 depositors against their own deposits. \n\n(b)\nAdvances to banks\u2019 own staff including retired staff. \n\n(c)\nAdvances granted to the Chief Executive Officer \/ Whole Time Directors. \n\n(d)\nLoans linked to some market determined external benchmark. \n\n(e)\nFixed rate loans granted by banks. However, in case of hybrid loans in which\nthe interest rates are partly fixed and partly floating, interest rate on the\nfloating portion should adhere to the MCLR guidelines. \n\n\n\ne) Review\nof MCLR \n\ni.\nBanks review and publish their Marginal Cost of Funds based Lending Rate\n(MCLR) of different maturities every month on a pre-announced date with the\napproval of the Board or any other committee to which such powers being\ndelegated. \n\nii.\nInitially banks which do not have adequate systems to carry out the review of\nMCLR on a monthly basis, could review their rates once a quarter on a\npre-announced date for the first one year i.e. up to March 31, 2017.\nThereafter, such banks should adhere to the monthly review of MCLR as mentioned\nabove. \n\nf) Reset\nof interest rates \n\ni.\nBanks may specify interest reset dates on their floating rate loans. Banks will\nhave the option to offer loans with reset dates linked either to the date of\nsanction of the loan\/credit limits or to the date of review of MCLR. \n\nii.\nThe Marginal Cost of Funds based Lending Rate (MCLR) as on the day the loan is\nsanctioned will be applicable till the next reset date, irrespective of the\nchanges in the benchmark during the interim.\n\n\n\n\n\niii.\nThe frequency of reset shall be one year or lesser. The exact frequency of\nreset shall form part of the terms of the loan contract. \n\ng) Treatment\nof interest rates linked to Base Rate charged to existing borrowers \n\ni.\nExisting loans and credit limits linked to the Base Rate may continue till\nrepayment or renewal, as the case may be. \n\nii.\nBanks will continue to review and publish Base Rate also. \n\niii.\nAll existing borrowers will also have the option to switch to the Marginal Cost\nof Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.\nHowever, this should not be taken as a foreclosure of existing facility. \n\nh)\nEffective date of these guidelines is April 1, 2016.