Chapter 22: Marginal Cost Based Lending Rate: A Study on the New Regime of Lending Rate Pattern of the Banking Operations in India

One of the recent financial sector reforms introduced by the Reserve Bank of India (RBI) with effect from April 1, 2016 is nothing but the marginal cost of fund-based lending rate (MCLR). MCLR is referred as an internal benchmark rate at which the banks can lend to its customers. The rate is determined on the basis of incremental cost of procurement of an additional rupee to the prospective borrower. MCLR was introduced by RBI with effect from April 1, 2016. The RBI has asked banks to set at least five MCLR rates – overnight, one month, three months, six months, and one year. For any tenure more than one year, banks are independent to set rates for longer durations. MCLR may be considered a double edged sword as referred to the base rate system which was a single edge sword to harm customers as the banks were slowly adopting decreases in base rate and quickly transmitting high interest rate to the customer. The rates have to be reviewed on a monthly basis, but banks that don’t have the capacity to do monthly reviews on can do so quarterly till March 2017.