BANK Rate, BASE RATE, MCLR, EXTERNAL BENCHMARK RATES

 

BANK Rate:

Rate at which RBI lends money to the banks for long tenures.

After the introduction of Liquidity Adjustment Facility (LAF), Bank rate has lost its relevance.

BASE RATE:

• Introduced in July 2010, these were the minimum interest rates decided by the Reserve Bank of India (RBI) below which banks were not allowed to lend funds to their customers. 
• No bank offers loans at an interest rate lower than the Base Rate without mandate from the government for the same.

Calculation of base rate was based upon the following factors:

• Average cost of deposit rates offered by the banks to their customers,
• Cost of maintaining CRR and SLR,
• Operation cost of banks and ROI on Networth. 

In 2016, Marginal cost of lending rates (MCLR) replaced Base Rate.

What is MCLR:

On 1 april-2016, MCLR replaced the Base rate as the Benchmark lending rate .

MCLR is built on the following 4 main components:

Negative carry on account of CRR: 

Cost incurred by the banks while keeping reserves (CRR) with the RBI. 

Operating cost: 

These are the operating expenses incurred by the banks

Tenor premium:

 It denotes that higher interest can be charged from long term loans

Marginal Cost: 

The marginal cost of funds comprises of Marginal cost of borrowings and return on NetWorth .Marginal Cost comprises of following factors:

• Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
• Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
• Return on NetWorth – in accordance with capital adequacy norms.

EXTERNAL BENCHMARK RATES (EBLR):

Introduced in 2019 to replace MCLR, EBLR is the Interest Rate defined by the External Benchmark.

EBLR is the lending rate which the Banks can choose from one of the four external benchmarks —

• Repo Rate, 
• Three-month Treasury Bill Yield, 
• Six-month Treasury Bill Yield or 
• any other Benchmark interest rate published by Financial Benchmarks India Private Ltd.
• The external benchmark was first proposed by the former governor Urjit Patel in 2018.
• EBLR shall be reset at least once every three months. 
• EBLR is intended to plug the deficiencies in MCLR.
• EBLR is now widely used in home loans and recently banks have started adopting EBLR for other retail products such as personal loans and education loans that were based on MCLR.
• EBLR has replaced MCLR as the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory. 

Fixed vs Floating Interest Rate:

• The fixed interest rate on loan means repayment of loans in fixed equal instalments over the entire period of the loan. 
• Floating interest rate by name implies that the rate of interest varies with market conditions. 
• The drawback with floating interest rates is the uneven nature of monthly instalments.