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- Recently, State Bank of India (SBI) raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years, signalling that the soft rates regime that has prevailed since 2019 may be over.
What is Marginal Cost of Funds Based Lending Rate?
- It was instituted by RBI with effect from April 1, 2016.
- It is the lowest interest rate that a bank or lender can offer.
- It is applicable to fresh corporate loans and floating rate loans taken before October 2019.
- RBI then switched to the external benchmark linked lending rate (EBLR) system where lending rate is linked to benchmark rates like repo or Treasury Bill rates.
- Aims and objectives:
- To improve the transmission of policy rates into the lending rates of banks.
- To bring transparency in the methodology followed by banks for determining interest rates on advances.
- To ensure availability of bank credit at interest rates which are fair to borrowers as well as banks.
- To enable banks to become more competitive and enhance their long run value and contribution to economic growth.
Source:IE
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