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    Marginal Cost of Funds based Lending Rate (MCLR)

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    9.35% Floating
    0% to 0.35% (max. ₹11,500)
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    9.45% - 10.25% Floating
    0.5% (min. ₹8,625) One time fee
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    9.55% - 9.80% Floating
    0.25% to 0.50%(min.₹11,500) One time fee
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    9.45% - 9.70% Floating
    0.5% (min. ₹11,500) One time fee
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    3-30 Years
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    9.45% Floating
    0% to 0.5% (max. ₹11,500) One time fee
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    1-30 Years
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    9.45% - 9.7% Floating
    0.5%
    2Crs Max
    1-25 Years
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    9.59% - 9.84% Floating
    0.5% (min. ₹8,625) One time fee
    15L - 15Crs
    1-30 Years
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    9.55% Floating
    0.25% (max. ₹10,000)
    10L - 3Crs
    30 Years
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    9.40% - 11.75% Fixed/Floating
    Up to ₹11,500 One time fee
    5L - 10Crs
    1-30 Years
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    9.30% Floating
    11,500 One time fee
    40L - 5Crs
    1 - 25 Years
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    9.40% Floating
    0.5% (min. ₹8,625) One time fee
    2L - 3Crs Women's Special!
    1-30 Years
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    9.4% - 9.55% Floating
    0 One time fee
    20L - 10Crs
    1-30 Years
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    Marginal Cost of Funds based Lending Rate (MCLR) is Rated as "Great!" by 19568 Users

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    Home Loan BYTES FROM OUR KITCHEN

    Change is good, right? Apparently, India’s apex bank, the Reserve Bank of India (RBI) adheres to this policy as it introduces a new system for commercial banks to zero-in on lending rates for the fiscal year. The aptly named Marginal Cost of Funds based Lending Rate (MCLR) will be applicable from April-2016 and will completely modify the existing lending rate system as followed by banks across India.

    The new system takes into account the risk associated with different class of customers, and will be subject to changes on a monthly basis based on such factors as repo rates and other borrowing rates. The latter includes borrowing and repo rate factors that were not primarily utilised in the earlier Base Lending Rate system. At the basic level, the RBI expects banks to fix five benchmark rates that correspond to differing loan tenures- the time periods stretching from one day to one year.

    At its core, MCLR isn’t a difficult concept to master. The new system is dependent on the idea of ‘marginal cost’ or the constantly updated formula that banks utilise to create their base lending rate, and the associated interest rate whilst borrowing money from deposits and/or the RBI. MCLR counts these two factors:

    1. Interest rate offered by banks on deposits, and
    2. Repo rate that banks furnish to obtain funds from the RBI, as primary factors for its calculation.

    Why the MCLR System?

    Usually, high impact changes are made as a means to regulate a vast, slow reacting target system. The latter, in this scenario, are the collective networks of the various public and private sector banks in India. Last year, the RBI affected game changing rate cuts with regards to its base lending rates. However, the banks were slow to adopt these rate cuts and the RBI had to repeatedly rebuke the banks for their uncharacteristic delay. Repo rates keep changing, but the banks are hesitant to correspondingly update their i-base lending rate and interest rates on deposits. A significant reason for the same is that banks choose to utilise RBI’s Liquidity Adjustment Facility (LAF) in order to source short term funds from the apex bank. This saves them the trouble of having to periodically update their lending and deposit rates. The RBI hopes that with MCLR, a faster feedback oriented system will be put into effect that will negate the shortcomings of the current base rate system.

    How will the Banks be impacted when MCLR is implemented?

    If there ever was a wily fox, RBI will be it. After effecting the popular repo rate cuts, a move that made well liked loan options like home loans, simpler to obtain, the apex bank had to face the inconvenient problem of banks taking their own sweet time to implement the corresponding changes in terms of their own base lending rate and interest rates on deposits. Enter MCLR. With this new system, banks are now forced to consider the current base lending rate when calculating their individual MCLR. Unlike the earlier base rate system, wherein banks weren’t obligated to implement RBI’s rate cuts immediately or in an equivalent quantum, MCLR ‘forces’ the banks to realign their interest rates on a monthly basis. And, while they are at it, the banks can subscribe to the latest repo rates and implement the same, ergo keep up with RBI’s updates.

    In a progressive economy, cuts in the base lending rate at the apex bank level must reach the common populace in the shortest time frame. Rate cuts encourage people to subscribe to loans and invest in the popular investment options. Ironically, this is only possible when banks implement said rate cuts in a quick, uniform and responsible way. MCLR is conceived to encourage the banks when it comes to adopting the latest repo rates as promoted by the apex bank of India.

    Differences between the Base Rate System and MCLR:

    The fundamental difference between both these systems are the factors that contribute to them individually. Summing up, the following factors are utilised to calculate the Base Rate and MCLR respectively,

    Base Lending Rate Marginal Cost of Funds based Lending Rate (MCLR)
    Interest rate offered on deposits. Marginal cost of funds.
    Bank’s operating costs. Bank’s operating costs.
    Profit, in terms of minimum rate of return. Tenor premium.
    Costs incurred in maintaining the Cash Reserve Ratio (CRR). This is a stipulated minimum fraction of the overall deposits maintained by the customers in any public/private sector Indian bank. Said bank deposits the CRR with the RBI in the form of cash or deposits. Negative Carry due to CRR- The RBI doesn’t offer any interest on the monies held by it as CRR from the banks. The bank can negate the effects of such non-performing assets and cover the costs by charging the same from loans that are offered to prospective customers. Hence, contributing to the MCLR.
    MCLR vs Base Rate

    Herein, the following pointers need expounding,

    Marginal Cost of Funds: The main lynchpin in the MCLR methodology, marginal cost of funds include two components:

    1. Marginal cost of borrowing from deposits or the RBI, and,
    2. The return of the net worth after a particular deposit has matured.

    As per the rules laid out by the RBI, banks must consider the following factors when deciding upon the marginal cost of funds,

    • Applicable interest rates offered for different types of deposits including term, current, savings bank and deposits in foreign currency.
    • Applicable short term interest rate, repo rate, borrowing rate for longer tenures, etc.
    • In line with set norms, return on net worth.

    Herein, note that when calculating the marginal cost of funds, the marginal cost associated with borrowings has a contribution of 92% whilst return on net worth commands a share of 8%.

    Bank’s Operating Costs: Everyday operational costs that is incurred by the bank in question.

    Tenor Premium: Represents the idea that long term loans can command a higher rate of interest.

    Summation: It must be noted that the bank’s operating costs and commitments with RBI in terms of the CRR are commonalities between the Base Lending Rate method and MCLR. However, in case of the latter, marginal cost plays a key role whilst with the former, the cost is ascertained by simply averaging the interest accumulated on the deposits. Also, MCLR is designed to be updated on a monthly basis as compared to the Base Rate method that is usually static, until jolted into action.

    How to Calculate MCLR?

    As explained above, going forward, Marginal Cost of Funds based Lending Rate (MCLR) will be the norm when it comes to the calculation of lending rates at the bank’s level. Popular loan options such as housing loans will definitely be impacted as banks are instructed to update their base lending rates and interest on deposits more frequently, whilst taking into account RBI’s current repo rate. The actual calculation itself depends on four primary factors-

    • Marginal cost of funds
    • Operational cost of the banks
    • Costs incurred in maintaining the Cash Reserve Ratio (CRR) with the RBI
    • Tenor Premium wherein more interest is likely charged from long term loans

    As is obvious, the concept of ‘marginal’ is an essential determinant when calculating MCLR. In a purely economic sense, marginal costs relate to the extra costs incurred in the production of additional units that adds to the producer’s production capabilities without inviting the same costs as were incurred per unit through the initial production. This can be easily mapped to the banking scenario as well, wherein lending rates can only be calculated after the marginal costs have been taken into consideration. This amounts to the costs that banks have to incur in order to generate funds. Not surprisingly, these costs are nothing but the interest rate that banks pay depositors for creating deposit portfolios with their organization. Further, these marginal costs are broken down into clearly defined sub-components. Herein, the repo rate that banks pay the RBI to ascertain short term funds is a crucial sub-component. Any change in the repo rate will bring a corresponding change in terms of the marginal cost and consequently the MCLR will also change. This is expected to be a clearly laid out path for RBI to ensure that the benefits arising from its periodic repo rate cuts are quickly and conveniently passed down to the target customer base.

    How MCLR Works?

    Marginal Cost of Funds-based Lending Rate (MCLR) ensures that the rates are revised based on the repo rates prevalent, the marginal cost of funds incurred by the bank and the tenor premium. This means that your bank’s lending rates could change more frequently than earlier. MCLR rates are reviewed every month but are fixed for a period of at least 1 year with respect to long-term loans.

    MCLR Example:

    Let us take the example of the State Bank of India (SBI). SBI has pegged its MCLR rates at 9.2% for 1 year for the current fiscal. The spread is of 25 basis points more than the MCLR. The bank has also declared the following MCLR rates for different periods:

    1. Overnight – 8.95%
    2. 1 month – 9.05%
    3. 3 months – 9.10%
    4. 6 months – 9.15%
    5. 2 years – 9.30%
    6. 3 years – 9.35%

    So if you are taking a home loan from the SBI now (after April 1, 2016), your interest rate will be 9.45% (9.2% MCLR + 0.25% spread). For a period of 1 year, this interest rate will be valid on your home loan and you have to pay Equated Monthly Instalments (EMIs) based on this. For example, if your loan amount is Rs. 45 lakh, then at the rate of 9.45% and for a tenure of 30 years, you’ll be paying an EMI of around Rs. 37,675.

    The following year, the rate will be revised and the new rates will automatically be applicable for another 1-year period. So if MCLR is reduced to 9% next fiscal for the same spread ratio, the interest rate will be reduced to 9.25%. Accordingly, your EMI will go down by around Rs. 500 per month.

    However, an increase in MCLR means that you will end up paying more to the bank than what you paid at the beginning of the loan term.

    RBI’s Take on MCLR:

    The Reserve Bank of India’s move to implement Marginal Cost of Funds based Lending Rate (MCLR) in the context of Indian banking is a timely and dynamic step. Aimed at inspiring more accountability from the banks with regards to the speedy adoption of updated repo rates, the finger print concerning MCLR reads as follows:

    1. Post April 1, 2016 all loans sanctioned, and existing credit limits renewed, will adhere to MCLR. Explicitly, MCLR will be regarded as a tenor linked internal benchmark.
    2. Banks will continue to publish and review Base Rates as usual.
    3. MCLR will be appended with additional components of the spread to determine the actual lending rate. Herein, spread allows banks to charge a higher interest rate from borrowers who are deemed ‘risky’.
    4. Banks are expected to publish the updated MCLR values for different products on a monthly basis, on a pre-selected date.
    5. All banks are free to specify dates for interest reset on loan products that subscribe to a floating rate. Banks can choose to offer loans with reset dates that are either associated with the actual sanction date, or the date that corresponds to the review of MCLR. Such resets must happen within a time frame of one year or less.
    6. All loans/credit limits that are currently subscribing to the Base Rate methodology will continue as usual, until their renewal/repayment. Borrowers can also move from Base Rate to MCLR, provided the same is chalked out through mutually agreed upon terms.
    7. MCLR that was in vogue at the time of the sanction of loan will continue unhindered till the next reset date. Meanwhile, any change in the associated benchmark will not have any impact on the aforementioned arrangement.
    Read the full script here

    FAQ on MCLR:

    1. What are the operational features of MCLR?
      1. Banks must revise MCLR on a monthly basis, while including the latest RBI repo rates as part of the calculations.
      2. Marginal costs that the bank incurs when getting funds (i.e, interest paid on deposits, costs incurred in maintaining the Cash Reserve Ratio (CRR), etc.) are factored in when calculating the lending rates.
      3. Marginal costs must also be considerate to repo rates, a factor that wasn’t a priority in the case of the erstwhile Base Lending Rate model.
      4. MCLR also includes a number of contributing factors, including a range of interest rates that the bank has to satisfy in its bid to accumulate the necessary funds.
      5. MCLR must also take into account higher interest rates that apply to long term loans. This is also known as Tenor Premium.
    2. What is ‘spread’ in banking terms? How does it impact MCLR?

      In simple banking terms, net interest rate spread refers to the difference between the interest that the bank earns on such products as loans and securities, versus the interest payable by it on deposits.

      With regards to MCLR, the RBI bulletin stipulates that banks must append the varied components of the spread onto the MCLR when determining the applicable lending rate. This will also allow banks to charge a higher interest rate on loan portfolios wherein the borrower is deemed as ‘risky’.

    3. What happens to existing loans that come under the purview of Base Lending Rate?

      The RBI is very clear with regards to the status-quo of Base Lending Rate. It maintains that existing loans/credit limits that subscribe to Base Rate will continue to do so, until repayment or renewal, whichever comes first. Further, existing borrowers, in compliance with their lenders, can opt to move their loan from the Base Lending Rate model to MCLR.

    4. What about my existing home loan? Is MCLR good for my loan situation?

      Don’t worry. The RBI was considerate to the request from various Indian banks about not linking existing loan portfolios to the new MCLR modus operandi. These loans will continue to operate per the Base Lending Rate option until they are closed or refinanced. Alternatively, you can request the shifting of your loan to the MCLR model, provided your lender is onboard with this idea.

      MCLR is good for you. In 2015, when RBI slashed a record 125 points off its repo rate, the banks delayed passing the ensuing benefits onto the target customers. MCLR will force your bank to constantly update its lending rate (on a monthly basis infact) while adopting the latest RBI repo rate to formulate this number. Consequently, your home loan EMIs will reflect these changes instantly. Note that industry experts do believe that eventually the old system and MCLR will merge into a single entity.

    News About MCLR

    • Increased liquidity softens lending rates

      The fall in corporate bond market rates have persuaded banks to reduce MCLRs. This is an attempt to prevent corporate customers from moving from credit to the bond market.

      Axis Bank has revised its MCLR by 0.05% across all tenures. So the rate for a lending tenure of one year has come down to 9.25%, and the home loans rates will be 0.25% higher than the base rate.

      Effective from August 1st 2016, SBI and ICICI Bank continue to offer the lowest rate with their one year MCLR being 9.10%. SBI’s home loan rate is lowest in the market, and it is just 0.20% to 0.25% higher than the base rate. ICICI and HDFC offer home loans at rates that are 0.40% to 0.45% higher than the one year MCLR.

      The infusion of Rs.80,000 crore of liquidity into the market by the RBI has caused the fall in debt market rates.

      6th September 2016

       
    • Borrowers insisting on lower MCLRs adversely affecting banks

      As banks have been updating their MCLRs across maturities regularly, large borrowers are trying to take advantage of the falling interest rates. If there is a drop in MCLR between the date of approval of the loan and the date of its disbursement, borrowers are increasingly requesting banks to lend to them at the lower rates.

      To mitigate this issue, banks have started adding a clause in the loan agreement that works in their favour. As per RBI guidelines, The MCLR prevalent on the day a loan is approved will hold good till the next date of reset, irrespective of changes in the interim. Banks also have the option to provide loans with reset dates linked to the date of approval or the review date of the MCLR.

      Although the MCLR mechanism has been in effect for less than a quarter, it is soon set to be revised by the central bank.

      25th August 2016

    • RBI to Reconsider MCLR Revision Structure Soon

      The Reserve Bank of India (RBI) is seriously considering the revision of MCLR (Marginal Cost Based Lending Rate) mechanism for banks to adopt to it in a much efficient manner. This system of computing interest rate for end users was mandated by the central bank from April 1, this year.

      However, there seem to be some tethering issues due to which banks have not been able pass on benefits of the periodic rate cuts to customers. From liquidity issues to FCNR(B) concerns, banks have had its own set of issues dealing with the MCLR system. It must be noted that the earlier mechanism used was the base rate system. As per the new mechanism, banks are required to announce MCLR for five tenures at least as reference for customers. They are also permitted to add a tenure premium to each of the five tenures.

      19th August 2016

    • Punjab National Bank’s MCLR Brought down By 5bps

      Punjab National Bank (PNB) has reduced its Marginal Cost of Funds-Based Lending Rate (MCLR) by 0.05 percentage points, with effect from August 1, 2016.

      The MCLR now ranges from 9.1 percent to 9.65 percent for tenures ranging from overnight to 1 year.

      MCLR is the new lending rate regime introduced by the Reserve Bank of India that replaced the base rate system for new loans. MCLR is estimated based on a bank’s marginal cost of borrowing and return on net worth. These rates are revised by banks on a monthly basis. 

      10th August 2016

    • Marginal Fall In Home Loan Interest Rates Owing To MCLR Cuts

      The State Bank of India and IDBI Bank have cut down their marginal cost of lending rate (MCLR). The fall in interest rate is not noticeable owing to the new benchmark in MCLR, with revisions as low as 5 basis points.

      MCLR of SBI has been reduced by 5 bps and is offering home loans at 20 bps above MCLR to its female customers and at 25 bps above MCLR to other customers. SBI’s one-year MCLR has been cut down to 9.1%. Meanwhile, IDBI Bank has decreased its base rate to 9.65% from 9.75%. The bank has also cut its MCLR, recently. Borrowers who have taken loans after the new MCLR came into effect will be able to avail these low rates, while the rest will have to wait for revision of the base rate.

      4th August 2016

    • MCLR Revision by Banks in June

      Banks such as ICICI Bank, SBI, Canara Bank and Punjab National Bank revised their MCLR (Marginal Cost of Funds-based Lending Rates) for the month of June. MCLR of these banks were dropped between 0.05 to 0.15%. While PNB and SBI did not revise the MCLR for a tenure of one year and maintained at 9.40% and 9.15%.

      Canara Bank slashed its MCLR rate by 0.10% to 9.35%, while State Bank of Bikaner and Jaipur dropped its rate by 0.15% to 9.55%.

      The MCLR lending rate system has been introduced by RBI to bring about uniformity and transparency in the calculation of home loan rates for both banks as well as borrowers. The new rates are aimed to meet RBI’s main objective of accelerating monetary policy transmission, apart from other things.

      9th June 2016

    • SBI Home Loans Cheaper with a 5 bps Drop in MCLR

      India’s largest lender, the State Bank of India, has cut down its MCLR (Marginal Cost of funds based Lending Rate) by five basis points. The overnight MCLR has come down to 8.90 per cent, resulting in the home loans becoming cheaper. Now, the rate of interest being offered by SBI to women borrowers is 9.35 per cent, while 9.40 per cent is the rate of interest for other borrowers. Currently, among all its peers, SBI is at the lowest MCLR.

      5th May 2016

    • Borrowing Rates Cheaper with Drop in Repo Rate and MCLR says RBI Governor

      Raghuram Rajan, RBI Governor said that loan rates will further drop, owing to the introduction of the MCLR pricing method which has already led to a 0.50% drop in lending rates. He quoted that the monetary policy review does not comprise of the 25bps cut alone but also the MCLR, making borrowing significantly cheaper.

      In the monetary policy report, there is an estimated push in headline inflation numbers by 1 to 1.50% owing to the 7th pay panel report’s implementation. According to Urijit Patel, the deputy governor, a large part of this is linked to the sharp hike in house rent allowances.

      26th April 2016

       
    • MCLR to Aid in the Flow of Corporate Borrowing of Rs.1.2 trillion to Banks

      According to India Ratings, the domestic rating agency, the introduction of MCLR (Marginal Cost of Funds based Lending Rate) is likely to direct the flow of commercial paper market surge towards banks. The agency has reported that there is a possibility that the commercial paper market demand between Rs.745 billion to Rs.1.2 trillion, which comprises of 3% to 5% will return back into the banking system.

      India Ratings has also predicted that larger banks will set its MCLR for the shortest tenor at 90bp to 100bps lower than the bank’s base rate. However, there may be a difference of nearly 25bp to 30bp in the longer run. The report also expressed its expectations of addressing RBI’s primary aim which is to accelerate the transmission of monetary policy.

      18th April 2016

       

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