In economics sense, marginal means the additional or changed SITUATION. While calculating the LENDING RATE, banks have to consider the changed cost conditions or the marginal cost conditions. For banks the cost for obtaining funds is BASICALLY the interest rate given to the RBI for getting short term funds.

Following are the main components of MCLR:

1. Marginal cost of funds;
2. Negative carry on account of CRR;
3. Operating costs;
4. Tenor premium

• Negative carry on account of CRR: Is the cost that the banks have to incur while keeping reserves with the RBI. The RBI is not giving an interest for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people.
• Operating cost: is the operating expenses incurred by the banks Tenor premium: denotes that higher interest can be charged from long term loans.
• Marginal Cost: The marginal cost that is the novel element of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on net worth. According to the RBI, the Marginal Cost should be charged on the basis of following factors: 
• Interest rate given for various types of DEPOSITS- savings, current, term deposit, foreign currency deposit.
• Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate.
• Return on net worth – in accordance with capital adequacy norms.

In economics sense, marginal means the additional or changed situation. While calculating the lending rate, banks have to consider the changed cost conditions or the marginal cost conditions. For banks the cost for obtaining funds is basically the interest rate given to the RBI for getting short term funds.

Following are the main components of MCLR: