All you should know about new MCLR

It is observed that in banking examinations, terms with special reference to Banking are regularly asked. These terms are useful for written examination as well as interview of almost every banking examination.  Aspirants are advised to read current news related banking industry on regular basis to enhance their overall general knowledge.

Here the banking team of Jagran josh is providing brief information on new MCLR.

What is MCLR?

MCLR (Marginal Cost of Funds based Lending Rate) is a benchmark rate which reflects the cost of funds for a particular tenure. For instance, if a bank cuts its one- year deposit rate, its one-year MCLR will see a decline.

Objective of RBI to introduce MCLR:

Since January 2015, the Central bank of India has gradually reduced the repo rate by 150 basis points. As against this, commercial banks have reduced their base rates only by 50–60 basis points till March this year.

While cost of funds of banks have come down owing to lower policy rates, they could not match their lending rates with reduced policy rates as their average cost of borrowing still remained high because of older fixed deposits. To make sure that the reduced policy rates are passed on to borrowers by banks, RBI introduced the Marginal Cost of Funds based Lending Rate (MCLR) methodology as an alternative to the earlier base rate system.

How it is different from earlier benchmark?

The earlier bench mark was the ‘base rate’. This was calculated to reflect average cost of funds. The base rate did not change if banks lowered deposit rates as existing deposits continued to earn interest on old rates.

Benefits of MCLR:

The new rules announced by the Reserve Bank of India in December 2015 take away from banks the freedom to decide when to revise rates.

Borrowers do not have to wait for the average cost of deposits for a bank to come down. The MCLR is reviewed every month based on prevailing costs of funds. So older customers will continue to pay old rates until the reset date (once a year). But new borrowers will get loans at new rates. MCLR will ensure banks pass on rate cuts immediately.

The implications

• The MCLR regime is applicable on floating rate home loans and term loans to SMEs and middle-level corporates. However, this will not apply to government-run credit schemes and fixed-rate home loans, personal loans, car loans or other fixed-rate loans.
• While new borrowers are covered under the MCLR system from April 1, 2016, existing borrowers can continue with the base rate system till repayment of loans. The existing borrowers also have an option to shift their loans to the new MCLR-based system on mutually acceptable terms.

Similarly, like the old base rate system, banks are not allowed to lend below the MCLR.

For example, Bank of Baroda charges its floating rate home loans of up to Rs 40 lakhs @ 9.60 per cent per annum (9.45 per cent MCLR plus 0.15 per cent spread), whose rate of interest will be reset half-yearly. So, if you availed a home loan from  Bank of Baroda on April 1, and the MCLR comes down to 9.20 per cent on July 1, you will still be paying interest rate @ 9.60 per cent till September 30 as your interest reset period is six months and it will not be reset before September 30. However, if the MCLR further gets reduced to 9 per cent p.a. on October 1, your rate of interest will also be reset at 9.15 per cent per annum (9 per cent MCLR plus 0.15 per cent spread) because of your half-yearly interest reset condition.