MCLR- MARGINAL COST OF FUNDS BASED LENDING RATE

After so many request received from my readers  re post this article

MCLR Kicks in Bye Bye Base Rate ( MCLR is going to create havoc for Bankers)

RBI has instructed all the Banks to Introduce Marginal Cost of Funds Based Lending Rate  popularly known as MCLR w.e.f  01 April 2016.

What is MCLR? 

Majority of the bankers are aware of Base Rate and its applicability.  Whenever there is a change in Base Rate it is applicable for all loans and advances.  ( Except for those customers  who have opted for fixed  ROI ).

MCLR is something like combo of Fixed and floating rate of interest.

The following are the important components for calculating the MCLR

1. Marginal Cost of funds.
2. Tenor Premium.
3. Operating Expenses.
4. Cost of Maintaining CRR.

Marginal Cost of funds takes into account ROI on Savings and Term Deposit accounts and also cost of Borrowings  from RBI with Repo Rate.   In Base Rate regime Repo Rate is not considered.  Now onwards any change in Repo Rate will have significant impact on MCLR.   Reduction and increase of Repo Rate by RBI will be immediately factored in MCLR.

Further due to inclusion of Tenor Premium i.e premium paid to raise long term funds MCLR will change along with the tenor of the Loan.  Majority of the banks have introduced the following tenors

1. Overnight
2. One Month
3. Three Month
4. Six month
5. One Year .

Important feature of MCLR is just like Fixed Deposits, the MCLR is fixed till the next reset date, irrespective of the changes in the MCLR  during the interim period. ( RBI has give freedom to banks with regard to the reset dates linked wither to date of first disbursement of loan or to the date of review of MCLR )

MCLR  has to be announced by respective banks on a pre announced date every month.  However for banks which do not have adequate technological infrastructure may announce MCLR once in a quarter on a pre announced date.  ( This relaxation is provided for only one year )

The following are some of the key points

1. Consent from existing borrowers should be obtained for switch over to MCLR.
2. Existing loans which are renewed on or after 01 04 2015 shall invariably priced under MCLR.
3. Base rate depends on Cost of funds and Margin where as MCLR depends on Marginal cost of Funds and Tenor Premium.
4. Advances to banks own and ex employees are exempted from MCLR.

Bankers have to put in extra time in explaining the new concept to the borrowers.  As we all know the interest rates are heading south, it should be made very clear to the customers that any reduction in ROI will be effective for new loans only and the reduction for him will be passed on to him in future only. Branches have to face the wrath of the existing customers.   We all know even for a failure of credit of gas subsidy bankers are being blamed.  Now with these new regulations customers will feel that they are being robbed.

With the implementation of the MCLR, any reduction in interest rates by RBI will be passed on to the customer immediately and effectively.