The RBI may review the implementation of the MCLR (marginal cost of lending rates) regime by banks as there were ‘structural and cyclical factors impeding transmission to bank lending rates, particularly stressed balance sheets of banks and sluggish credit growth’.
This was necessitated given the context of significant softening of long-term yields, the RBI said in its monetary policy report.
“In this scenario, the Reserve Bank would continue to manage liquidity pro-actively and consistent with the stance of monetary policy, while taking timely and appropriate measures to insulate the system from shocks,” the report said. Introduced on April 1, 2016, MCLR was designed to take care of the demerits of both the BPLR and the base rate regimes.
Under the MCLR system, banks determine their benchmark lending rates linked to marginal cost of funds. The MCLR has four components: marginal cost of funds — marginal cost of borrowings comprising deposits and other borrowings, and return on net worth, negative carry on account of cash reserve ratio (CRR), operating costs and term premium/discount for prescribed maturities.
The MCLR plus spread is the actual lending rate for a borrower. The spread comprises two components — business strategy and credit risk premium.
The components of the MCLR vary widely across banks at any point in time, and reflect the differences in the composition and maturity profile of their liabilities — current, savings and time deposits, besides the extent of reliance on retail vis-a-vis wholesale customers, which has a bearing on the cost of funds.
It also shows divergences in the operating cost environment of banks arising from differences in the use of technology, quality of human capital and the geographical spread of bank branches in addition to the return on net worth expected by banks.