PLR (Prime Lending Rate), MCLR & Repo Rates
To stay relevant in the competitive market, commercial banks used unfair practices
for lending money. Ultimately, borrowers want the best deal with the lowest interest
rate for higher amounts.
In the recent past, the nation's monetary body, the Reserve Bank of India (RBI), has
taken some unexpected measures regarding the loan lending rates & its policies.
Thus, the measures were compulsory because the fluctuating interest rates of
commercial banks were affecting the borrowers and directly or indirectly the
country's economy.
For this, RBI introduced PLR, MCLR and revised Repo rates to fix those issues &
maintain a transparent financial system.
Prime Lending Rate
The Prime Lending Rate (PLR) or Prime Rate is the interest rate at which the banks
lend money to their creditworthy customers.
RBI introduced the Benchmark Prime Lending Rates (BPLR) in 2003 for ensuring the
appropriate loan pricing & transparency in the system.
As of 2022, India's highest prime rate is 8.80, and it fluctuates between 6.60% to
8.90%, following the individual banks.
Significance of PLR
The PLR acts as a reference point for other interest rates such as mortgages,
automobile loans, credit cards & more.
The prime rate also affects the financial liquidity in the market, and both have an
inverse proportionality ratio with each other. If the Prime Lending Rate is
decreased, the liquidity is increased & hence easier, meaning the loans becomes
affordable & easier to access.
How to calculate PLR The Prime Lending rate is broadly affected by Federal Funds Target Rate or fed funds. The prime rate is fed funds + 3%, meaning if the Federal Funds Target Rate is 2%, then the prime rate will be 5%.
MCLR
MCLR is the Marginal Cost of Funds Based by Lending Rates was introduced in the
Indian financial system by RBI in 2016.
MCLR is the minimum interest rate at which banks aren't permitted to lend the loan;
however, it is not applicable in some exceptional cases. MCLR is the internal
reference to the banks for determining their interest rates on loans.
Significance of PLR
Since MCLR replaced the base rate from the Indian monetary system, the banks' prime
customers couldn't take undue advantage.
The MCLR depends upon the repo rate issued by the RBI & due to the MCLR
implementation, the interest rates involves a lot of respective risks for the
individual borrowers.
How to calculate MCLR Banks calculate MCLR based on loan tenor meaning the period that a borrower will take to repay the loan along with interest. Generally, the loan amount & the tenor have a proportionality ratio. For calculating the exact lending rates, the banks consider the following:
- Tenor
- The marginal fund's cost.
- Operating Cost
- Negative carry on the CRR(Cash Reserve Ratio)
HDFC: 7.20%
ICICI: 7.25%
AXIS: 7.40%
SBI: 7.00%
Repo rate
Repo rate is the interest rate at which the nation's financial body, the Reserve Bank of India (RBI), lends money to the commercial banks when the commercial banks are short of funds. The repo rate is decided by the Monitory Policy Committee (MPC) of RBI, and as of February 2022, the repo rate is 4%.
Significance of Repo rate
The repo rate is a powerful tool to control cash liquidity and money supply.
In addition, the repo rate is a robust solution for controlling inflation. The MPC
increase in the repo rate prevents the commercial banks from lending money from the
RBI, and this docks off the money supply in the market & hence no inflation.
How to calculate Repo rate
The MPC of RBI calculates the Repo rate based on inflation & recession in the market.
Difference between repo rate & reverse repo rate
The Reverse repo rate is the interest the RBI pays to the commercial banks when the commercial banks deposit additional funds in the Central bank treasury.
The repo rate is always higher than the reverse repo rate to keep an eye on inflation. Meanwhile, the reverse repo rate is used for measuring the overall money supply in the economy. As of February 2022, the reverse repo rate is 3.35%.
| PLR | MCLR | Repo Rates |
|---|---|---|
| Issued by RBI | Internal rate | Issued by MPC of RBI |
| Obeyed by NBFCs and HFCs | Obeyed by banks | Obeyed by banks |
| No fixed time or reviewing and resettling the PLR interest rate | Reviewed once a month & reset once a year | Reviewed every two weeks & reset once in three months |
