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MCLR Vs Base rate

MCLR Vs Base rate mechanism:

 Prior to the introduction of #MCLR, bank had minimum rate of interest known as #Base_rate.
Now the formula to calculate base rate had four inputs namely:
1. Cost of deposit like tier I tier II capital deposits etc

2. Operational cost like the price spend to raise business and loan, building operating cost staff cost etc

3. Profit margin which banks seek to make for its shareholders 

4. Negative return on CRR since crr money cannot be used by bank for its business nor RBI refunds the opportunity cost to the commercial bank.

But this system had some flaw. It was not taking into account Repo rate reverse Repo rate etc into consideration directly.  It was left to the bank.

So in 2016, RBI came with another tool called MCLR Marginal Cost of fund based Lending Rate.

This MCLR had its own formula of calculation which was borrowed  from the above formula of Base Rate with tweaks and updated input to the formula.
MCLR formula also have four inputs. They are:

1. Operational cost like base rate above 

2. Negative return on CRR like base rate above

3.  Term period of loan or tenor premium- it means higher the time period of loan, greater the risk of default.

4. Marginal cost of fund : now this marginal cost of fund includes Repo rate in it

So ,technically a Repo rate change has its effect on MCLR.  if all things kept constant then raise of RR will increase MCLR too and vice versa.

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