The incremental cost of borrowing more money to fund additional asset purchases or investments. In its simplest calculation, the marginal cost of funds is simply the interest rate on the new loan balance. Marginal cost of funds is often confused with the average cost of funds, which would be calculated by computing a weighted-average of all the combined loans' interest rates.

1. Marginal Cost Funds

2. Definition of 'Marginal Cost Of Funds'
• The incremental cost of borrowing more money to
fund additional asset purchases or investments.
• In its simplest calculation, the marginal cost of funds
is simply the interest rate on the new loan balance.
• Marginal cost of funds is often confused with the
average cost of funds, which would be calculated by
computing a weighted-average of all the combined
loans' interest rates.
For more details visit : https://www.letzbank.com/

3. Various reasons for introduction of
MCLR
• Improvise the transmission of policy rates into rates at which
the banks would lend.
• To bring transparency in the methods followed by carious
banks to determine the rate of interest on advances.
• To ensure that the bank credit is available at interest rates that
is fair to both the borrowers and the banks.
• To make banks more competitive and also enhancing the long
run value of banks in order to ensure economic growth.
For more details visit : https://www.letzbank.com/

4. MCLR comprises of following
1. Marginal cost of funds :
Marginal Cost of Fund = (92% * Marginal Cost of
borrowed Amount) + (8% * Return on Net-worth)
• The fixed weightage of 8% that is given to return on
net worth is prescribed as Tier 1 Capital for the bank.
• Whereas the marginal cost is referred to average rate
that which the deposit of similar maturity was raised
For more details visit : https://www.letzbank.com/

5. 2. Negative carry on account of' Cash
reserve ratio
• Negative carry on mandatory CRR arises when the
return on CRR balance is nil.
• Negative carry on mandatory statutory liquidity ratio
- also known as SLR balances arise only if actual
return there is lower than the cost of fund.
For more details visit : https://www.letzbank.com/

6. 3. Operational Cost
• Operational cost that is associated with providing the
loan includes the cost of raising fund and excluding
the costs that are separately covered in any form of
service charges.
For more details visit : https://www.letzbank.com/

7. 4. Tenure Premium
• The tenure premium is never borrower specific or
loan class specific and remains uniform for all kinds
of loan products for a given residual tenure.
• The banks may publish an internal benchmark or
MCLR on a monthly basis depending on the
maturities which can be Overnight, One-month,
Three-months, Six months, One year, MCLR for any
other maturity which the bank considers fit.
For more details visit : https://www.letzbank.com/

8. Base rate different from MCLR
• Interest rate for various types of deposits.
• Borrowings
• Return on net worth
Therefore the deposit rates and repo rates are the key
factors that determine MCLR
For more details visit : https://www.letzbank.com/

9. How to apply for MCLR?
• For customers who have borrowed money from the
bank before the 1st April 2016 need not do a thing
and the bank they are partnered with will link their
loan accounts with MCLR automatically.
• For customers who have not opted for base rates need
to take a call and decide if they wish to link their
accounts to MCLR depending on your ease.
For more details visit : https://www.letzbank.com/

10. Contact us
Letzbank,
Plot No. 4,, 1-98/8/9/A, Image Gardens Rd, Madhapur,
500081 Hyderabad, Telangana,
India.
040-48586878
support@letzbank.com
For more details visit : https://www.letzbank.com/