Often commercial financial institutions are reluctant to alter their lending and deposit rates, followed by a change in repo rate. In fact, the transmission of the benefits of repo cuts was often delayed. As a means to overcome such shortcomings, the Reserve Bank of India launched the MCLR rate.
Marginal Cost of Funds Based Lending Rate or MCLR is the lowest possible interest rate at which financial institutions can offer loans. It is an internal benchmark that was introduced in April 2016.
The Reserve Bank of India introduced this benchmark to pass down the benefits of repo cuts to borrowers. The introduction of MCLR rates is an effective means to ensure that lenders do not charge an interest rate beyond RBI's prescribed margin.
Generally, loans offering floating interest like housing loans and loans against property are linked to MCLR's current rate. However, some financial institutions may offer fixed-rate housing loans under certain schemes.
The MCLR rates (w.e.f 1st August 2020) in Home loan are given in a tabular format below -
Being an internal benchmark, the MCLR rate is determined by individual financial institutions based on the loan repayment tenor.
Note that the calculation of MCLR for Home Loan is based on multiple variables. The major factors are discussed below –
The formula prescribed by the Reserve Bank of India for calculation of MCLR is given below:
Marginal cost of funds = Marginal borrowing cost x 92% + return on the net worth x 8%
Since MCLR rate for home loan is quite similar to base rate in terms of purpose, individuals often confuse the two benchmarks.
Having an insight into the underlying differences can help in making an informed borrowing decision.
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Last update on 11-Mar-2021
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