Question
In the calculation of the Marginal Cost of Funds, what
is the weightage given to the Marginal Cost of Borrowings compared to the return on net worth?Solution
In the calculation of the Marginal Cost of Funds based Lending Rate (MCLR), the Marginal Cost of Borrowings is given a weightage of 92%, while the Return on Net Worth is given a weightage of 8%. This means that the cost of borrowing funds to the bank has a significantly larger influence on the overall MCLR than the return generated by the bank's capital.   The MCLR is composed of four main components: the Marginal Cost of Funds (MCOF), Negative Carry on Cash Reserve Ratio (CRR), Operating Costs, and Tenor Premium.  The MCOF is the average rate at which a bank raises deposits with similar maturities, and it's a key component of the MCLR.  To calculate the MCOF, the bank considers weighted average borrowed capital ( cost of borrowings ) and owned capital (return on networ th ) Â
- Marginal Cost of Borrowings: This refers to the cost incurred by banks when they borrow funds, including from various sources like savings deposits, term deposits, and borrowings from other banks or the RBI.  the Marginal Cost of Borrowings is given a weightage of 92%, Â
- Return on Net Worth: This represents the profitability generated by the bank's equity capital, which is also a component of the MCOF.  T he Return on Net Worth is given a weightage of 8%.  Â
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