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    Question

    Which of the following is not a component of

    MCLR?
    A Marginal cost of funds Correct Answer Incorrect Answer
    B Negative carry on account of CRR Correct Answer Incorrect Answer
    C Operating costs Correct Answer Incorrect Answer
    D Tenor premium Correct Answer Incorrect Answer
    E Administrative cost Correct Answer Incorrect Answer

    Solution

    MCLR or Marginal Cost of Lending Rates refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. It is an internal benchmark or reference rate for the bank. The MCLR methodology for fixing interest rates for advances was introduced by the RBI with effect from April 1, 2016 . This new methodology replaces the base rate system introduced in July 2010. In other words, all rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 would be priced with reference to the MCLR which will be the internal benchmark. Banks will review and publish their MCLR of different maturities, every month, on a pre-announced date. The MCLR comprises of the following: ·         Marginal cost of funds calculated as “Marginal cost of funds = (92% x Marginal cost of borrowings) + (8% x Return on net worth)” ·         Negative carry on account of' Cash reserve ratio (CRR )- as the return on CRR balances is nil ·         Operating Cost associated with providing the loan product, including cost of raising funds, but excluding those costs which are separately recovered by way of service charges. ·         Tenor Premium - The change in tenor premium cannot be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor

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