Marginal Cost of Funds based Lending Rate (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
Internal Benchmark
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:
Marginal cost of funds;
Negative carry on account of CRR;
Operating costs;
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
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-
Thus marginal cost of
funds is used for computing negative carry on CRR.
v. Operating
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
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
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.
Accordingly, all banks shall publish their internal benchmark for the following
a. overnight MCLR,
b. 1-month MCLR,
c. 3-month MCLR,
d. 6-month MCLR,
e. One year MCLR.
also have the choice of publishing MCLR of any other longer maturity
Banks should have a Board approved policy reflecting the components of spread
charged to a customer. The policy shall include principles:
To ascertain the quantum of each component of spread.
To ascertain the range of spread for a given category of borrower / type of
To delegate powers in respect of loan pricing.
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
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.
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
The stipulation contained in sub-paragraph (iii) above is, however, not
applicable to loans under consortium / multiple banking arrangements.
Interest Rates on Loans
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.
Exemptions from MCLR
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.
Working Capital Term Loans (WCTL), Funded Interest Term Loans (FITL), etc. That
are granted under the rectification/restructuring package.
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.
The following loans can also be exempted from being linked to MCLR as the
benchmark for computing interest rate:
Advances to banks’ depositors against their own deposits.
Advances to banks’ own staff including retired staff.
Advances granted to the Chief Executive Officer / Whole Time Directors.
Loans linked to some market determined external benchmark.
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
Banks review and publish their Marginal Cost of Funds based Lending Rate
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
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
f) Reset
of interest rates
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.
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.
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
Existing loans and credit limits linked to the Base Rate may continue till
repayment or renewal, as the case may be.
Banks will continue to review and publish Base Rate also.
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.
Effective date of these guidelines is April 1, 2016.

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