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MCLR Rate: What it is and How is it Calculated?

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  • MCLR: What Does It Mean?

  • What is MCLR Interest Rate?

  • How Does MCLR Interest Rate Affect You?

  • How to Cushion the Effects of MCLR Interest Rate Increase?

The Reserve Bank of India introduced the Marginal Cost of Funds-Based Lending Rate (MCLR) to curtail the issue of unfair lending rates being implemented by lenders. The MCLR aims to set the benchmark on the rates of interest for all types of loans. 

This means that the average bank or other financial institution cannot approve loans or set rates of interest on loans below the MCLR benchmark. This does not only concern the banks and affiliate financial institutions but equally involves the borrowers. What is the MCLR meaning, and what is MCLR interest rate, you ask? Read on to learn more about the MCLR. 

MCLR: What Does It Mean?

The MCLR simply refers to the minimum lending rates set by banks or affiliate financial institutions on any type of loan. The MCLR acts as a replacement for the base rate system. It also specifies the procedures crucial for determining the interest rates on loans. 

Two of the MCLR’s primary objectives are to: 

  1. Facilitate the implementation of the lending policy rates defined by the Indian Reserve Bank, and ensure that all Indian financial institutions comply fully. 
  2. Ensure transparency and fairness are a watchword for financial institutions when fixing interest rates on loans for borrowers and credit interest rates for banks as well.

Considering the banking industry’s relevance to India’s economy, MCLR is a tool to help portray the image of India’s financial institutions as a trustworthy resource for accessing credit. The table below offers some insights into the difference between the MCLR and the base rate system standards.

Base Rate System MCLR
The rates of interest for loans were determined by base rates.  Borrowers enjoy REPO rate benefits through the Reserve Bank of India’s MCLR system.
The calculation for the base rate depends on certain factors like the rate of bank deposits, earnings, bank’s operating costs, etc. MCLR relies on certain factors like Cash Reserve Ratio (CRR), the marginal cost of funds, a premium on loan tenor, operating costs, etc. 
REPO rates set by the Reserve Bank of India (RBI) were not mandatory. Banks did not always comply.  For the MCLR system, the REPO rate changes are compulsory.
Banks could choose to change the base rate quarterly at their discretion. The MCLR rates vary for varied loan tenors.
There was an absence of transparency and accountability on the financial institutions’ part.  There is increased transparency and accountability.

From this table, it’s apparent that the MCLR is a better way to regulate bank lending rates because: 

  1. It facilitates the effective transmission and application of policy rates set by the Indian Reserve Bank.
  2. Financial regulation in India is harmonized thereby providing equity in the lending rates.
  3. It ensures that the benefits of the Indian Reserve Bank’s interest rate cuts are available to borrowers. 
  4. It leads to a reduction in the Equated Monthly Instalments (EMIs) on any loan.

What is MCLR Interest Rate?

It is important to note that the MCLR lending rate system only applies to floating interest rate loans, so it cannot be implemented in fixed interest loans. Banks and affiliate financial institutions are mandated to publish their minimum loan rates for various tenors ranging from daily interest rates to monthly rates like 3 months and 6 months. The rates may also stretch to a year.   

This equips prospective and existing customers with the knowledge necessary for making a smart loan choice. With the knowledge of the MCLR, they can adjust to new lending rates when necessary too. Transferring your Loan to the MCLR system is a smart move. For individuals that have accessed loans before the MCLR’s implementation can transfer their loans to enjoy the new system’s benefits.  

How Does MCLR Interest Rate Affect You?

It is important to note that an increase in MCLR will lead to an increase in your loan EMI. Just recently, for the first time since the implementation of MCLR, the RBI increased the REPO interest rates. This means that the MCLR rates will rise, forcing financial institutions, banks included, to increase their lending rates. This may cause increased rates of interest on loans and the EMIs that accompany the loans.

How to Cushion the Effects of MCLR Interest Rate Increase

The increases are inevitable and can not be managed. However, you are not entirely powerless. Below are steps you can take to cushion the effects of the MCLR hike. 

  1. You can increase the tenor on your loans. Doing this reduces the EMI and allows you to enjoy flexibility and peace of mind.
  2. Make some amount of loan prepayment. Doing this reduces your EMIs significantly and increases your chances of withstanding the impact of a sudden lending rate hike.

How is MCLR Rate Calculated?

Banks and financial institutions calculate MCLR rate against the following:

  • Tenor premium
  • Operating costs of the bank
  • Negative carry-on Cash Reserve Ratio (CRR)
  • The marginal cost of funds

Financial institutions borrow money from several internal sources fixed deposits, current accounts, amongst other accounts that are operational in the bank. They also secure funding through equity returns and so on. 

Must Read: Difference Between MCLR and Base Rate

How to Apply for Loans with the Best MCLR Rates

Now that you know what the MCLR is, you can apply for home loans, business loans, and many more through Bajaj Housing Finance to enjoy the best MCLR rates and benefits.


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