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Marginal Cost of Funds based Lending Rate (MCLR)

Posted on : 18 Jan 2020

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  • The marginal cost of funds based lending rate (MCLR) is the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI.
  • It is an internal benchmark or reference rate for the bank. It describes the method by which the minimum interest rate for loans is determined by a bank on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower.
  • It is for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016.
  • Existing loans and credit limits linked to the Base Rate or Benchmark Prime Lending Rate would continue till repayment or renewal, as the case may be.
  • However, existing borrowers will have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.

Article Related Questions

  1. Consider the following statements regarding Marginal Cost of Funds based Lending Rate (MCLR)
    1.MCLR is an internal benchmark to decide minimum interest rate below which a bank can’t lend.
    2.RBI replaced MCLR with an external benchmarking mechanism in order to improve Monetary Policy transmission.
    Which of the above statements is/are incorrect?

  2. 1.1 only

    2.2 only

    3.Both 1 and 2

    4.Neither 1 nor 2

    Right Ans : Neither 1 nor 2

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