Marginal Cost of Funds Based Lending Rate (MCLR)–An Evaluation

RBI was facing a good deal of criticism because commercial bank's lending rates were not decreasing as fast as some groups expected it to come down. With a view to overcoming such criticism, RBI wanted the efficiency of monetary policy transmissionto improve andprescribed a formula whereby comm...

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Bibliographic Details
Published in:TSM business review 2017-12, Vol.5 (2), p.31-34
Main Author: Basu, U. K.
Format: Article
Language:English
Subjects:
Banking industry
Central banks
Commercial banks
Commercial credit
Cost control
Equity capital
Interest rates
Liberalization
Loans
Marginal costs
Monetary policy
Operating costs
Studies
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Summary:RBI was facing a good deal of criticism because commercial bank's lending rates were not decreasing as fast as some groups expected it to come down. With a view to overcoming such criticism, RBI wanted the efficiency of monetary policy transmissionto improve andprescribed a formula whereby commercial banks could work out a Marginal Cost of Funds based Lending Rate(MCLR). We undertake a critical evaluation of the two equations used by RBI for this purpose and find that there is some lack of overall compatibility in the entire process. We re-formulate these equations to accommodate the requisite internal consistency and re-work the Marginal Cost of Funds based Lending Rate. The current scenario for NPAs and possible irrecoverable loan assets of commercial banks is also discussed and its possible impact on MCLR is dwelt on.
ISSN:2348-3784
DOI:10.23837/tbr/2017/v5/n2/164230