Question about interest rate on loan.

P
Paisashield Admin
03 July 2019 1 min read

MCLR (Marginal Cost of Funds based on Lending Rate)

It is an internal lending rate of reference for banks, to determine the minimum rates of interests for loans. For this, they take into account the additional or incremental cost of arranging additional rupee for a prospective buyer. Under MCLR, banks are under an obligation to adjust their interest rates as soon as the repo rate changes.

T-Bill (Treasury Bills)

Treasury Bill is a short term (up to 1 year) debt issuance from the Government of India, which is an external benchmark rate, published by an independent benchmark administrator recognized by Reserve Bank of India. These instruments are issued at a discount and redeemed at the face value on maturity, which provides the interest rate return on the security. T-Bills are therefore considered more stable over MCLR.

Spread

Lending institutions will add a spread over the benchmark rates at the time of financing. The actual interest rate on the loan is the base rate +/- spread. The base rate is normally linked to an external benchmark (e.g. T-Bill) or an internal rate (e.g. MCLR) as published by the financial institution.

The spread varies depending on multiple criteria - the credit history and repayment pattern of the borrower, security provided on the loan, borrower's relationship with the lender, etc.

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