Government-owned Union Bank of India on Friday announced a reduction in its marginal cost of funds-based lending rate (MCLR) by 20 basis points across tenors.
The new rates in effect from July 11, 2020.
The Union Bank of India in a release informed that the new one-year MCLR is applicable at 7.40 percent as compared to 7.60 percent earlier.
However, the three-month MCLR has been decreased to 7.10 percent while six-month MCLR has been decreased to 7.25 percent.
This stands the 13th consecutive rate cut by Union Bank of India since July 2019.
What is the marginal cost of funds-based lending rate (MCLR)?
The marginal cost of funds-based lending rate (MCLR) is the minimum or the lowest interest rate that a bank can grant a loan at.
MCLR is a “tenor-linked internal benchmark” — means the interest rate is set internally by the bank based on the period left for the repayment of a loan.
MCLR is closely related to the actual deposit rates. It is calculated based on 4 components:-
- a) the marginal cost of funds
- b) negative carry on account of cash reserve rate
- c) operating costs
- d) tenor premium
The country’s largest lender, Reserve Bank of India (RBI) started the MCLR regime for fixing rate interest from 1 April 2016 that replaced the base rate structure of July 2010,
Under MCLR, lenders are free to offer all types of loans on either fixed or floating interest rates. The real lending rates for loans of several tenors are resolute by summing the components of spread to MCLR. Therefore, the lender cannot provide a loan at a rate lower than MCLR of a particular maturity.
Union Bank of India: Some other Banks that Reduced their MCLRs
Bank of Baroda yet another public bank that has announced a depletion in its MCLR by five basis points covering all tenors from July 12, 2020.
The one-year MCLR has been decreased to 7.60 percent from 7.65 percent earlier. The six-month MCLR has been reduced to 7.45 percent from 7.50 percent earlier, Bank of Baroda said.
India’s largest bank, State Bank of India has also cut its MCLR by 5-10 basis points (bps) for shorter tenors. The cut is effective from Friday.
Indian Overseas Bank (IOB) has reduced its MCLR by up to 25 bps across tenors.
Earlier this week, Bank of Maharashtra (BoM) reduced its MCLR by 10 bps and Canara Bank also cut its MCLR by 20 bps, across all tenors.