How is the MCLR rate determined by banks?

The MCLR rate is determined by banks based on several factors. The specific methodology and formula used to calculate the MCLR rate can vary slightly from one bank to another, but the basic principles remain similar. Here are some key factors considered by banks in determining the MCLR rate:

1. Cost of funds: Banks consider the cost at which they borrow funds, including the cost of deposits, borrowings from other banks, and other sources of funds.

2. Marginal Cost of Funds: Banks also consider the marginal cost of funds, which is the incremental cost of acquiring additional funds to lend. This includes factors such as the repo rate set by the central bank, operating costs, and the cost of maintaining cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

3. Tenor Premium: Banks may also add a premium to account for the tenor or term of the loan. Longerterm loans may have a higher MCLR rate compared to shorterterm loans.

4. Credit Spread: Banks consider the credit risk associated with borrowers. Higherrisk borrowers may be charged a higher MCLR rate to compensate for the additional risk.

5. Operating Costs and Profit Margin: Banks factor in their operational costs and profit margin requirements when determining the MCLR rate.

It's important to note that the Reserve Bank of India (RBI) sets guidelines for the calculation of MCLR rates, and banks are expected to adhere to these guidelines while determining their MCLR rates.