Difference b/w MCLR & Base Rates – Know Here – RBI Grade B Exam

Often while reading Economic/Financial news or listening to Business news, you must have come across the terms Base Rate and MCLR and often must have wondered what are these rates. Some of you might be aware of the terms while some others might not be. So in this blog post, we would discuss about these rates and the difference between MCLR and Base Rates. We would also know here who controls these rates and how these rates affect the lives of the common man. The MCLR is also determined by considering deposit rates and repo rates, along with operating costs and cost of maintaining the cash reserve ratio

SSC-Quant

Register for the RBI Grade B Mock Tests Here

Difference between MCLR and Base Rates

Base Rate

1. The base rate is the minimum rate of interest that is set by a country’s central bank (RBI) for lending a loan. This rate is usually taken as the standard interest rate by all the banks functioning in the country.

2. Once the base rate is announced by the central bank (RBI), no bank is permitted to offer any type of loan to its customers at a rate that is lower than the base rate that has been set by the central bank of a nation. 

3. To make the credit market more transparent & to ensure that the banks charge a lower interest rate (to improve the transmission of monetary policy), Reserve Bank of India, on July 1, 2010, introduced the concept of base rate across all banks in India.

Register for the RBI Grade B Mock Tests Here

Calculation of Base Rate 

Each bank is free to determine its own base rate, based on the norms provided by the RBI. The Base Rate is determined by considering the following factors:

  • Average Cost of Funds – This is the interest rate given on the deposits.
  • Operating costs/Unallocatable Overhead Costs – These are the expenses that go into running the day to day operations and includes several components like legal expenses, depreciation, administrative costs, cost of stationery etc.
  • Negative Carry in the Cash Reserve Ratio – This is the cost that the banks need to incur in order to keep a specific amount of cash reserves with the RBI.
  • Margin of Profit/Average Return on Net Worth – This figure indicates the profitability and net amount obtained.

As a result, the Base Rates may vary from bank to bank, due to the differences in one of the factors given above. Mostly, it is the difference in the interest rates provided on deposits by different Banks.

Register for the RBI Grade B Mock Tests Here

MCLR (Marginal Cost of Fund Based Lending Rate)

1. The MCLR or Marginal Cost of Fund based Lending Rate refers to the minimum interest rate which a bank must charge for lending to its customers. Banks cannot grant any loan below this rate, except in certain cases permitted by the Reserve Bank of India (RBI). 

2. MCLR replaced the Base Rate on 1 April 2016. It is an internal reference rate for banks to decide what interest they can levy/charge on loans. For this, they also take into account the additional or incremental cost of arranging additional rupee for a prospective buyer.

3. Under the MCLR regime, banks must adjust their interest rates as soon as the repo rate changes.

4. After MCLR implementation, the interest rates are determined as per the relative riskiness of individual customers. It is a risk-based approach to determine the final lending rate for borrowers. It considers unique factors like the marginal cost of funds instead of the overall cost of funds. Such marginal costs take into account the Repo Rate, which did not form part of the base rate. 

5. In the case of MCLR, the banks should now include a tenor premium. This means they can charge a higher rate of interest for loans with long-term horizons.

Factors considered while calculating MCLR.

  • Marginal/incremental cost of funds
  • Calculated by taking into account the tenor premium
  • The MCLR is also determined by considering Deposit Rates and Repo Rate,
  • Also Operating Costs and Cost of maintaining Cash Reserve Ratio

So, this was all from us in this blog of “Difference between MCLR and Base Rates”. We hope that you understood both the terms and the difference between them. 

Read More:

Read More:

  1. Monetary Policy of India – A Brief Overview
  2. Fiscal Policy of India – A Brief Overview
  3. Know about Fiscal Consolidation & FRBM Act & Latest Updates
  4. 36th GST Council Meeting Imp. Updates & Functions – RBI Grade B
  5. Types of Risks in Banks – Concepts and Definition
  6. Inflation – Types, Causes, Effects, Indicators – Study Notes for ESI
  7. Bonds – RBI Grade B Study Notes for Finance & Management
  8. Accounting Ratios – RBI Grade B Notes for Finance & Management
  9. Time Value of Money – Finance Notes for RBI Grade B Exam
  10. Poverty Alleviation & Employment Generation – RBI Grade B Study Notes
  11. Corporate Governance in Banking Sector – RBI Grade B Study Notes
  12. Risk Management in Banking Sector – RBI Grade B Finance Notes
  13. Govt. Schemes & Policies Announced – Budget 2019 – Free Ebook
  14. Budget Outlay for Government Schemes – FY 2019-20 – Free Ebook
  15. Union Budget 2019-2020 – Sector-Wise Summary

Oliveboard Edge – What is Oliveboard Edge? How does it benefit you?

  1. Oliveboard Edge/Edge+ is a Subscription Platform that enables you to get Oliveboard’s Video Courses and Mock Tests under just one Subscription.
  2. Edge offers unlimited access to a majority of Oliveboard’s Online Video Learning Courses whereas if you subscribe to Edge+, you will get Video Courses as well as Mock Tests for Upcoming Exam.
  3. It offers you a way to study different courses just under one subscription unlike before wherein you needed to buy separate courses for different exams.

One Plan. All Courses – Features

1. Unlimited Access: Any Course, Any Time

2. Unlimited Choice: Exam, Section, Topic-Wise Courses

3. Unlimited Variety: New Courses Every Week

Oliveboard’s Subscription Platform for Unlimited Access to Online Classes & Mock Tests


Leave a comment