The minimum interest rate below which banks and financial institutions cannot lend as it would be infeasible, or not allowable by a regulator, to do so. However, there are exceptional situations (with permission from a regulator) where banks can still lend below it. This rate is determined based on multiple factors: the marginal cost of funds, operating costs, cost of carry in cash reserve ratio and tenor premium.
It is an internal rate that forms a floor for banks to extend their floating-rate loans.
This rate differs from the base rate which is based on the average cost of funds, rather than marginal cost (current cost of funds). The marginal cost lending rate is also more reactive to changes in policy rates.
This rate is also known as marginal cost of funds based lending rate or for short as MCLR.
