MCLR Rate
MCLR stands for Marginal Cost of Funds-based Lending Rate. It is the minimum interest rate that a bank must charge on loans, introduced by the Reserve Bank of India in April 2016. MCLR replaced the Base Rate system to make loan interest rate changes more responsive to shifts in the RBI’s monetary policy.
What Is MCLR?
The MCLR is calculated based on the marginal cost of funds, which means the cost of raising new money (new deposits, borrowings) rather than the average cost of all existing funds. This makes MCLR more sensitive to current market conditions and helps ensure that when the RBI changes its repo rate, the impact reaches borrowers faster.
How Is MCLR Calculated?
MCLR has four components:
1. **Marginal cost of funds** – the weighted average of interest paid on new deposits and borrowings; repo rate has a 92% weight in this
2. **Negative carry on CRR** – the cost of maintaining mandatory cash reserves with the RBI
3. **Operating cost** – the bank’s administrative and operational expenses
4. **Tenor premium** – additional cost for longer loan tenures
Banks review MCLR monthly (or more frequently) and publish separate MCLRs for overnight, one month, three months, six months, one year, two years, and three years.
MCLR vs Base Rate
| Feature | Base Rate | MCLR |
|———|———–|——|
| Basis | Average cost of funds | Marginal cost of new funds |
| Transmission | Slow | Faster |
| Review | Quarterly | Monthly |
| Introduced | July 2010 | April 2016 |
Reset Period
Most home loans and personal loans are linked to the 1-year MCLR with a reset period of 1 year. This means your loan rate resets once a year based on the prevailing 1-year MCLR on the reset date. If MCLR falls, your EMI or loan tenure reduces on the reset date; if MCLR rises, it increases.
MCLR and EBLR
Since October 2019, the RBI mandates that new floating rate retail loans (home loans, personal loans, auto loans) must be linked to an external benchmark such as the repo rate, not MCLR. However, existing loans continue under MCLR until the borrower requests a switch or the loan is refinanced.
Practical Example
Kavya took a home loan in 2017 linked to 1-year MCLR plus 0.2%. The MCLR at the time was 8.2%, so her rate was 8.4%. The bank reviews MCLR annually in January. In January 2024, MCLR falls to 8.35%. On Kavya’s next reset date, her rate drops to 8.55%. The transmission is not immediate but happens on the reset date.
Key Takeaways
– MCLR is the minimum lending rate based on the marginal cost of new funds
– It transmits RBI policy rate changes faster than the old Base Rate system
– Most home and personal loans taken between 2016 and 2019 are linked to MCLR
– The reset period (usually 1 year) determines when your loan rate is updated
– New retail loans since October 2019 are linked to external benchmarks (repo rate), not MCLR
