MARGINAL COST OF FUND-BASED LENDING RATES

1. Context

2. Reasons for the hike

• Last week, the RBI raised its benchmark repo rate the rate at which it lends to banks by 25 bps to 6.5 per cent, taking the cumulative increase in the key rate by 250 bps since May 2022.
• The country's largest lender State Bank of India (SBI) has increased its MCLR by 10 bps across all tenors, effective February 15, 2023.
• The overnight MCLR has been hiked by 10 bps to 7.95 per cent.
• The bank is offering a rate of 8.1 per cent each on one-month and six-month MCLRs, compared to 8 per cent earlier on both the tenors.
• The lender has raised the one-year MCLR to 8.5 per cent from 8.4 per cent earlier.
• The two-year and three-year MCLRs have been revised to 8.6 per cent and 8.7 per cent respectively.

3. Other Banks

• Another state-run lender Bank of Baroda (BOB) has increased its MCLR by 5 bps across all tenors from February 12.
• The bank has revised the one-year MCLR to 8.55 per cent from 8.5 per cent.
• The overnight, one-month and three-month MCLRs stand at 7.9 per cent, 8.2 per cent and 8.3 per cent, respectively.
• Indian Overseas Bank (IOB) has raised MCLR by up to 15 bps across all its tenors.
• The one-year MCLR has been hiked to 8.45 per cent from 8.30 per cent.
• Similarly, one-month, three-month and six-month MCLRs have also been raised by 15 bps to 7.9 per cent, 8.2 per cent and 8.35 per cent, respectively.
• The overnight, two-year and three-year MCLRs have been revised upwards by 10 bps.

4. About MCLR

• MCLR Introduced on April 1, 2016, MCLR is the minimum interest rate below which banks cannot lend.
• Banks calculate all operating costs as a percentage of the marginal cost of funds for computing MCLR.
• Under the MCLR regime, banks decide on the interest rate at which they will offer to borrowers based on the marginal cost at which they get funds, through funds and by borrowing from the RBI.

5. Impact 

• Any change in the repo rate the rate at which the RBI lends money to banks to meet their short-term funding needs impacts the interest rate for borrowers.
• Banks review their MCLR of different maturities every month on a pre-announced date with approval from their boards.
• To further improve the transmission of repo rates to banks' lending and deposit rates, the RBI in  October 2019 introduced the External Benchmark linked Lending Rate (EBLR) system.
• Banks now offer lending rates which are linked to the RBI's repo rate or yields on treasury bills.
• Any change in the repo rate immediately gets reflected in the bank's lending rate.
• Some segments of borrowers were issued loans before October 2019, continuing with the old MCLR regime.

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