Main Note - [Marginal Cost of Funds-based Lending Rate (MCLR) System-2016](Interest%20Rates%20on%20Loans%20&%20Advances.md#Marginal%20Cost%20of%20Funds-based%20Lending%20Rate%20(MCLR)%20System-2016) in [Interest Rates on Loans & Advances](Interest%20Rates%20on%20Loans%20&%20Advances.md) 1. Method to find MCLR under the [Marginal Cost of Funds-based Lending Rate (MCLR) System - 2016](Interest%20Rates%20on%20Loans%20&%20Advances.md#Marginal%20Cost%20of%20Funds-based%20Lending%20Rate%20(MCLR)%20System%20-%202016) 2. Until the [Aug 12, 2026](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=63355) RBI (Interest Rates on Loans and Advances) Directions, 2026 *(DRAFT)* , [this](https://rbidocs.rbi.org.in/rdocs/content/pdfs/161MDCBIRA281125_AN1.pdf) method was used. Why 92% and 8%? 1. Because loans aren't funded purely by deposits and borrowings, they're also funded by shareholder capital (equity/net worth), and that capital isn't free. So we need add return on net-worth to the cost of funds. 2. [Basel III Pillars/RBI capital adequacy rules](Basel%20III%20Pillars.md) require banks to hold roughly 8% of risk-weighted assets in form of common equity Tier 1 capital-CET1 Capital (Minimum Tier 1 Capital of 5.5% + CCB of 2.5%) against every loan they give out. 1. [What is Common Equity Tier 1 (CET1) capital?](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=13159) 3. So notionally, for every ₹100 of loans, approx. ₹92 is funded by deposits/borrowings, and approx. ₹8 is funded by shareholders' equity (net worth), which is Tier-1 capital. So we must remember that this 92:8 split mirrors the regulatory capital requirement itself, not an arbitrary number. 4. Also the 92:8 split only holds exactly when risk weight = 100%. For risk weight >100% like the unsecured loans, NBFC exposures), RWA exceeds the loan amount, so 8% of RWA is now _more_ than 8% of the actual loan, so the true equity-funded share (from tier-1 capital) of that specific loan is higher than 8%. The 92:8 ratio is really a book-average approximation, not loan-specific. So it works cleanly only for the "average" 100% risk-weighted asset, not for individual high-risk-weight exposures. 3. Aug 12, 2026 - [Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 (DRAFT)](https://rbidocs.rbi.org.in/rdocs/content/pdfs/LOANS12082026_A1.pdf), RBI prescribed [new simpler formula](https://rbidocs.rbi.org.in/rdocs/content/pdfs/LOANS12082026_A1.pdf). >Minimum capital requirement applicable to a bank are in "Table 1:Minimum capital requirement applicable to a bank" in [Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy), 2026]( ## Related Notes 1. [Interest Rates on Loans & Advances](Interest%20Rates%20on%20Loans%20&%20Advances.md) 2. [Interest Rates on Deposits](Interest%20Rates%20on%20Deposits.md) ## Regulations & Directions 1. [Regulations & Directions](Interest%20Rates%20on%20Loans%20&%20Advances.md#Regulations%20&%20Directions)