What is MCLR?
The Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum interest rate below which a bank cannot lend. Introduced by the Reserve Bank of India (RBI) in April 2016, it replaced the older Base Rate system to improve transparency in loan pricing and ensure better transmission of monetary policy.
Key Components of MCLR:
- Marginal Cost of Funds: Cost banks incur to raise funds (includes deposit rates, repo rate, etc.).
- Negative Carry on CRR: Cost banks bear due to the cash reserve ratio (CRR) requirements.
- Operating Costs: Costs incurred by banks to run their operations.
- Tenor Premium: Higher interest rate charged for longer loan tenures due to increased risk.
How Does MCLR Affect Loan Interest Rates?
Most floating-rate loans from banks are now linked to MCLR. The final interest rate you pay is:
Interest Rate = MCLR + Spread (bank margin)
So, if your bank’s 1-year MCLR is 8.00% and your home loan has a spread of 0.25%, your effective rate is 8.25%.
Reset Period:
Your loan rate doesn’t change immediately with every MCLR revision. It resets at a fixed interval — often annually — based on your loan agreement.
MCLR vs Base Rate vs RLLR
| Feature | Base Rate | MCLR | RLLR |
|---|---|---|---|
| Introduced | 2010 | 2016 | 2019 |
| Linked To | Average cost | Marginal cost of funds | RBI Repo Rate |
| Transmission speed | Slow | Moderate | Fast |
| Transparency | Medium | Better | High |
Pros and Cons of MCLR
✅ Advantages:
- More transparent than the base rate system.
- Reflects market interest rates better.
- Helps borrowers benefit from falling interest rates over time.
⚠️ Disadvantages:
- Delayed transmission due to reset periods.
- Banks still have some discretion in setting the spread.
Should You Switch to an MCLR-Based Loan?
If you’re on a base rate loan or a higher fixed rate, switching to an MCLR-linked or Repo Rate-linked loan could reduce your EMI. However, consider the conversion fee, reset clause, and compare current rates before switching.
Conclusion
Understanding MCLR is essential for any loan borrower in India. It not only affects your monthly outgo but also helps you make informed decisions when taking or refinancing a loan. Always stay updated on your bank’s latest MCLR rates and review your loan terms periodically.
📌 Pro Tip: Visit your bank’s website regularly or check your loan statement to see how MCLR changes are affecting your EMI. You can also explore switching to a Repo-Linked Lending Rate (RLLR) if you want quicker transmission of rate changes.