# Know What Is MCLR And How Does It Affect

An MCLR is the minimum interest rate at which a bank can lend. In this article, you will learn what MCLR is and how it has evolved recently.

The Marginal Cost of Funds Based Lending Rate (MCLR) was introduced in April 2016 to allow borrowers of various loans (including home loans) to benefit from the Reserve Bank of India’s (RBI’s) rate cut. In the wake of this new rate structure, lenders are no longer allowed to charge interest rates above the margin prescribed by RBI. Therefore, it is crucial to understand how MCLR works and the recent developments related to it to repay your loans affordably.

### Understanding MCLR

MCLR Rate is the minimum interest rate at which a bank can lend. Under MCLR, banks are free to provide all types of loans at fixed and floating interest rates. The actual lending rates are calculated by adding the components of various categories of loans and tenors. For loans of different categories and maturities, the bank determines its lending rates by adding the spread components to the MCLR. Therefore, it cannot lend at a rate lower than the MCLR of a particular maturity for all loans linked to that benchmark. However, certain exceptions can be made when allowed by the RBI.

### Calculating MCLR

MCLR is a tenor-linked internal benchmark, meaning that the bank determines the rate according to the period left for loan repayment. The MCLR is based on a range of factors in order to broaden the use of this tool. The four major elements of MCLR include the following:

Tenor premium: It is the premium charged by the banks for the risk associated with lending for higher tenors. Tenor premium is not specific to a loan class or borrower but is uniform across all types of loans.

Marginal Cost of Funds: Marginal cost of funds (MCF) is calculated by taking into account all the borrowings of a bank. This 8% is equivalent to the risk of weighted assets as denoted by the Tier I capital for banks.

Negative Carry on CRR: CRR or Cash Reserve Ratio is a proportion of the bank’s fund that banks in India are supposed to submit to the RBI in the form of liquid cash, mandatorily. Under MCLR, banks are given a certain allowance for that, called Negative Carry on CRR, which is calculated as under:

Required CRR × [marginal cost ÷ (1 – CRR)]

Operating cost: Banks incur various expenses for raising funds, opening branches, paying salaries and so on.