Aug 24, 2023

What is MCLR? Understanding MCLR in Banking and Loans

by Godrej Properties Limited



In recent years, the Marginal Cost of Funds Based Lending Rate (MCLR) has gained prominence in the banking sector, especially concerning home loans. As an internal benchmark rate, MCLR determines the minimum rate at which a loan can be availed. This article will explore what is MCLR, its factors, and its effects on home loan Equated Monthly Instalments (EMIs).

What is MCLR in Banking?

MCLR, introduced in April 2016, replaced the earlier 'Base Rate' system to calculate loan interest rates. MCLR in Banking ties the interest rates to the bank's marginal cost of funds, including savings account rates, term deposit rates, short-term interest rates, and return on net worth. With this internal benchmark, banks extend loans based on MCLR rates, providing more transparent and dynamic lending practices.

What is MCLR in A Loan?

All floating interest rate loans sanctioned after April 1, 2016, are linked to MCLR rates. These loans include:

Home Loans

Loans Against Property

Corporate Term Loans

Factors Affecting MCLR

The calculation of MCLR involves several key components, including:

Marginal Cost of Funds: It considers various interest rates and returns banks incur while acquiring funds.

No Return on Cash Reserve Ratio (CRR): Banks do not earn interest on the reserves maintained with the RBI.

Operating Costs: These encompass the expenses incurred by banks in their operations.

Tenure Premium: Signifying higher interest charges on long-term loans affects MCLR rates.

MCLR vs Base Rate System

Base Rate uses simple averages, but MCLR calculations are more complex and consider the following:

Marginal Cost Calculation: The costs incurred by the bank to arrange deposits and their marginal fees.

Inclusion of Repo Rate: MCLR rates are directly proportional to changes in the repo rate set by the RBI.

Minor Interest Rates: Banks account for minor interest rates while calculating costs, adding to the dynamism of MCLR rates.

Monthly Revisions: MCLR rates are revised monthly based on the calculation system.

Exemptions under MCLR

Loans exempt from the MCLR system include:

Fixed-rate home loans, vehicle loans, and personal loans

Loans associated with government schemes

Loans from non-banking financial institutions and housing finance bodies

Switching to the MCLR system is a straightforward process, but it requires careful consideration. As MCLR rates fluctuate with repo rate revisions, borrowers must weigh the potential benefits against any additional charges involved.

Conclusion: MCLR Decoded

The MCLR has brought transparency and flexibility to banks' lending practices, impacting home loan EMIs. Understanding MCLR's intricacies empowers borrowers to make informed decisions, ensuring they are well-prepared for any rate fluctuations and aligning their home loan choices with their financial goals.

Frequently Asked Questions

Q: Is MCLR superior to the base rate? 

A: MCLR surpasses the base rate as it reflects the current cost of funds, making it more responsive to policy rate changes.

Q: When repo rates rise, do banks change their lending rates immediately? 

A: Banks usually act promptly, revising their lending rates in proportion to the repo rate hike announced by the RBI.

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