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Marginal Cost of Funds Based Lending Rate (MCLR)

Marginal Cost of Funds Based Lending Rate

MCLR stands for Marginal Cost of Funds Based Lending Rate. It is the benchmark interest rate that commercial banks in India use to determine the lending rates for various loan products. Introduced by the Reserve Bank of India (RBI) in 2016, MCLR replaced the earlier base rate system.

Read about: Indian Financial System

Need of MCLR

The need for MCLR (Marginal Cost of Funds Based Lending Rate) can be understood from the following points:


MCLR brings transparency to the lending rates offered by banks as it is based on the actual cost of funds for the bank. It helps borrowers understand the factors influencing their loan interest rates.

Faster Transmission

MCLR allows for quicker transmission of changes in policy rates set by the central bank to the lending rates offered by banks. This ensures that borrowers can benefit from rate cuts faster and also reflects changes in the cost of funds more accurately.

Enhanced Competition

MCLR encourages competition among banks as they have to revise their lending rates more frequently. This leads to better interest rates and terms being offered to borrowers.


MCLR provides different tenors (e.g., overnight, monthly, quarterly, etc.) to link loan products, allowing borrowers to choose a loan with an interest rate reset frequency that suits their preferences and expectations.

Alignment with Market Conditions

MCLR takes into account the marginal cost of funds for the bank, which reflects current market conditions. This ensures that the lending rates are more aligned with prevailing market rates.

Better Transmission to End Borrowers

MCLR promotes the more efficient transmission of monetary policy changes to the end borrowers, aiding in effective control of inflation and fostering economic stability.

Read about: Difference Between Organised and Unorganised Sector

MCLR vs Base Rate 

The difference between MCLR and Base Rate can be understood from the following table. 

      Aspect MCLR (Marginal Cost of Funds Based Lending Rate) Base Rate
Calculation Method Based on the bank’s marginal cost of funds Based on average cost of funds
Review Frequency Periodically reviewed, typically monthly Reviewed at the bank’s discretion
Transmission Speed Faster transmission of policy rate changes Slower transmission of rate changes
Interest Rate Reset Linked to different tenors (e.g., overnight, monthly, quarterly) Typically reset annually or at the bank’s discretion
Transparency Provides transparency in lending rates Lacks transparency in rate setting
Customization Offers flexibility with different tenors Offers limited customization options
Competitive Pricing Promotes competition among banks Less competitive due to lack of frequent revisions
Market Alignment Reflects current market conditions May not always align with market rates

Read about: Payment Banks

Calculation of MCLR 

MCLR (Marginal Cost of Funds Based Lending Rate) is calculated by taking into account the following components:

Marginal Cost of Borrowing (MCOB)

This includes the interest paid on new deposits and borrowing from various sources, such as other banks, interbank markets, and market instruments like bonds.

Negative Carry on Cash Reserve Ratio (CRR)

CRR is the portion of deposits that banks are required to maintain with the central bank. Banks do not earn interest on this amount, so the cost of maintaining CRR is factored into the MCLR calculation.

Operating Costs

These are the costs incurred by banks in conducting their regular business operations, including administrative expenses, staff salaries, overheads, and other operational costs.

Tenor Premium

A premium is added to the MCLR based on the tenor (or term) of the loan. Longer-term loans may have a higher premium to account for the increased risk and costs associated with longer tenors.

Marginal Cost of Funds

It is the weighted average cost of borrowing for the bank, taking into consideration the proportions of different sources of funds and their respective costs. The marginal cost is typically calculated based on the current cost of funds and the proportion of various sources in the bank’s funding mix.

Once these components are determined, the bank calculates the MCLR by adding the components together. The exact formula for calculating MCLR may vary slightly from bank to bank, as each bank may have its own methodology and internal guidelines for determining the MCLR. It is important to note that the MCLR is reviewed periodically, usually on a monthly basis, to reflect changes in the cost of funds for the bank.

Read about: Private Sector Banks


Understanding the concept of MCLR (Marginal Cost of Funds Based Lending Rate) is crucial for UPSC aspirants as it aligns with the UPSC Syllabus. MCLR relates to monetary policy, banking, and financial institutions, which are part of the UPSC economy Syllabus. Reputable UPSC Online Coaching platforms often cover MCLR as part of their curriculum, providing comprehensive knowledge on the topic. Furthermore, MCLR and related concepts can be tested by aspirants by attempting UPSC Mock Test.

Read about: Public Sector Banks

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Marginal Cost of Funds Based Lending Rate FAQs

What is MCLR?

MCLR stands for Marginal Cost of Funds Based Lending Rate, which is the benchmark lending rate used by banks in India to determine loan interest rates.

Why was MCLR introduced by the RBI?

MCLR was introduced by the RBI to bring more transparency, better transmission of policy rates, and fair pricing of loans based on the actual cost of funds for banks.

How often is the MCLR updated?

MCLR is typically updated on a monthly basis by banks.

How to calculate MCLR?

MCLR is calculated by considering components such as marginal cost of funds, negative carry on cash reserve ratio, operating costs, and tenor premium.

What is difference between MCLR and repo rate?

The repo rate is the rate at which the RBI lends money to commercial banks, while MCLR is the benchmark lending rate used by banks to determine loan interest rates, and it is influenced by the repo rate but not directly linked to it.


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