MCLR – Marginal Cost of Funds basedLending Rate

What is MCLR?

The MCLR is a rate given by the RBI to banks in India. It indicates the minimum rate at which an RBI recognized bank or financial institution can lend money to borrowers. When the MCLR drops, customers can avail loans from banks at a lower rate of interest.

The MCLR is a relatively new concept in the Indian banking system. It was introduced by the RBI on 01 April 2016 to check the lending behaviour of banks and financial institutions.Before this, banks were looselypegging the loan interest rates on the Base Rate.

The MCLR ensures that the benefit of a lower repo rate (the rate at which banks borrow from RBI) is passed on to borrowers as soon as there is a change in the repo.

Is Base Rate Same as MCLR?

No, the base rate and the MCLR are two different concepts. The base rate is calculated basis the total cost of raising funds for a financial institution or bank.  MCLR is the cost of raising new funds for a bank and includes the cost that it incurs for maintaining the CRR/ SLR.

Does the MCLR Vary Across Banksand Financial Institutions?

Yes, the MCLR rates vary across lending banks and financial institutions.

Apart from the MCLR communicated by RBI, the actual MCLR rates offered by a bank or financial institution is determined by the following factors.

How Does the MCLR Impact Borrowers?

Changes in MCLR only affect loans that are on floating interest rates and not fixed rates of interest.

When the repo rate increases, the MCLR rates charged by banks harden (and vice-versa).When this happens, the EMI on loans (with floating interest rates) increases. In this case, as a borrower,you can ask your bank to increase the loan tenor. Or, you can make a part pre-payment to lower the EMI burden.

The MCLR is a dynamic interest rate. Banks and financial institutions are required to publish their MCLR rates for different loan maturities every month.Borrowers who have taken large loans before April 1, 2016, may benefit from switching to loans that are based on MCLR.

There are two options – you can either approach your existing bank to switch your loan from the base rate to the MCLR or you can approach another lending institution that offers loans at MCLR to take over your loan (also known as refinance and balance transfer).

Is there a Drawback to an MCLR loan?

Yes, the MCLR also has an inherent drawback – it is not immediately responsive to changes in the repo rate. Banks can take 6 to 12 months to effect a change in the MCLR due to a change in the repo rate.

To combat this lag, the RBI introduced the concept of repo linked lending rate (RLLR) from October 1, 2019.