TSM Business Review

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RBI was facing a good deal of criticism because commercial bank’s lending rates were not decreasing as fast as some groups expected it to come down. With a view to overcoming such criticism, RBI wanted the efficiency of monetary policy transmissionto improve andprescribed a formula whereby commercial banks could work out a Marginal Cost of Funds based Lending Rate(MCLR).

We undertake a critical evaluation of the two equations used by RBI for this purpose and find that there is some lack of overall compatibility in the entire process. We re-formulate these equations to accommodate the requisite internal consistency and re-work the Marginal Cost of Funds based Lending Rate. The current scenario for NPAs and possible irrecoverable loan assets of commercial banks is also discussed and its possible impact on MCLR is dwelt on.


Keywords

Liberalisation, Tandon Committee, Marginal Cost of Funds, Marginal Cost of Borrowings, Return on Net Worth, Marginal Cost of Funds Based Lending Rate, Negative Cost of Carry, Operating Cost, Tenor Premium, CRR, SLR, NPA, Irrecoverable Loan Asset, Interest Spread, Global Financial Crisis.
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