Banking Awareness: What is MCLR and Its Impact on Indian Economy

SBI reduces MCLR by 35 bps, cuts savings rate by 25 bps on all deposits. Know the effects of this reduction and everything about MCLR and the methodologies used to calculate it.

| Updated On May 1st, 2020 at 11:35 am

One of the country’s largest lender, State Bank of India (SBI), announced yesterday that it has decided to cut interest rates on saving accounts by 25 basis points and MCLR by 35 basis points. This will come into effect from April 15, 2020, which means that savings accounts will earn 2.75 per cent an annum. Not only does bank has decided to do reduction in savings deposit rates,it has also decided to  cut marginal cost-based lending rates (MCLR) by 35 bps across all tenors. (1 basis points/bps = 0.01 per cent).

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As per the  SBI press release, “The one year MCLR will now comes down to 7.4 per cent per annum from 7.75 per cent, with effect from April 10, 2020 resulting in the  the eleventh consecutive cut in MCLR in FY 2019-20.” the press release stated.

Tenor-wise MCLR effective from 10th April, 2020 will be as under:

Tenor Existing MCLR (In %) Revised MCLR (In %)*
Over night 7.45 7.1
One Month 7.45 7.1
Three Month 7.5 7.15
Six Month 7.7 7.35
One Year 7.75 7.4
Two Years 7.95 7.6
Three Years 8.05 7.7

Source: SBI Website

Effects of MCLR Reduction:

  • This rate reduction will also has a positive impact on loans as, EMIs on eligible home loan accounts (linked to MCLR) . It will get cheaper by around Rs. 24.00 per 1 lakh on a 30 year loan,
  • savings accounts having the balances up to Rs 1 lakh will earn 2.75 per cent, down from 3 per cent. The same is applicable to the case with balances above Rs. 1 lakh — they will earn 2.75 per cent a year.
  • Last month, SBI had decided to give the zero balance facility to its cutomers which will eventually benefit 44.51 crore saving bank account. Zero balance facility along with redcution in MCLR will increase the interest of the customer in saving during this lockdown period.

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What Is MCLR?

The marginal cost of funds-based lending rate (MCLR) refers to  the minimum interest rate that a bank can lend at to its customers. MCLR is a tenor-linked internal benchmark, which means that this rate it internally decided by the bank depending on the time left for the repayment of the loan.

MCLR is closely linked to the actual deposit rates and as per RBI MCLR “MCLR is calculated using methodology prescribed shall correspond to the tenor of funds in the single largest maturity bucket provided it is more than 30% of the entire funds reckoned for determining the MCLR”. The other components that are helpful in calculating the MCLR are : the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.

Let’s Understand the methodology of MCLR Calculation  from the official website of RBI.

Table II.1: The Base Rate and the MCLR Methodologies – A Comparison
Base Rate System
(effective July 1, 2010)
MCLR System
(effective April 1, 2016)
(a) Cost of (Borrowed) Funds

(b) Negative Carry on cash reserve ratio (CRR)/statutory liquidity ratio (SLR)

(c) Unallocatable Overhead Cost

(d) Average Return on Net Worth

Base Rate = a+b+c+d

  • One base rate for each bank
  • Any benchmark could be used
  • Frequency: Quarterly review with Board’s approval
  • No prescribed reset period
  • Fixed rate loan – not below base rate

(a) Marginal Cost of Funds
[= 92% of Marginal Cost of Deposits and Other Borrowings + 8% of Return on Net Worth]

(b) Negative Carry on CRR

(c) Operating Cost

(d) Tenor Premium/Discount

MCLR = a+b+c +d

  • Tenor-linked benchmark
  • No discretion allowed on benchmark
  • Frequency: Monthly on a pre-announced date
  • Reset period indicated in contract. Maximum one year reset period for floating rate loans
  • Fixed rate loan over 3 year tenor – exempt from MCLR.

But there can be certain situation when we might get confuse as to how we can apply this methodology. Let’s understand that with an example and its explanation from the official website of RBI.

1.The guidelines specify that MCLR calculated using methodology prescribed shall correspond to the tenor of funds in the single largest maturity bucket provided it is more than 30% of the entire funds reckoned for determining the MCLR. But my bank does not have a single time bucket which has more than 30% share of the funds reckoned for MCLR. In such a case, the MCLR calculated as per the methodology indicated shall correspond to which tenor?

Let’s assume a bank has following maturity profile of borrowings:

Sr. No. Original Maturity Balance outstanding as a percentage of total funds (other than equity) Cumulative weightage
1 5 years & above 15.1% 15.1%
2 3 years & above but less than 5 years 11.8% 26.9%
3 2 years & above but less than 3 years 9.3% 36.2%
4 1 year & above but less than 2 years 16.9% 53.1%
5 6 months & above but less than 1 year 24.3% 77.4%
6 91 days & above but less than 6 months 10.5% 87.9%
7 Up to 90 days 12.1% 100%
Total 100%

In this case, the MCLR shall correspond to the weighted average of tenor of the first three time buckets.

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The Reserve Bank of India introduced the MCLR methodology on 1st April 2016 to fix interest rates. It came into existence by replacing the base rate structure, which had been in place since July 2010.

Fixed-rate loans with time of up to three years are  priced according to MCLR. Banks can review and publish MCLR of different maturities, every month. There are Certain loan rates, like  fixed-rate loans with tenors above three years and special loan schemes offered by the government, are not linked to MCLR.

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Frequently Asked Questions:

Q. What is MCLR?

Ans. The marginal cost of funds-based lending rate (MCLR) refers to  the minimum interest rate that a bank can lend at to its customers.

Q. How much MCLR does SBI has decided to reduce?

Ans. SBI has decided to reduce MCLR by 35 basis points.

Q. How much saving rate has been lowered by SBI?

Ans. Saving rate has been lowered by 25 basis points by SBI.

Q. When did MCLR came into effect?

Ans. The Reserve Bank of India introduced the MCLR methodology on 1st April 2016 to fix interest rates.