What is the Link between CIBIL Score and MCLR?

In today’s time, a large segment of India’s population avails different types of loans to meet their financial requirements. With the increase in the number of lending institutions, availing a loan has become a comparatively hassle-free process. However, it is to be noted that while approving the loan amount, lenders check various aspects of the loan-applicant. One of the most important aspects that lenders take into consideration is the CIBIL score of the borrower. The CIBIL Score and Marginal Cost of Funding-based Lending Rate (MCLR) are closely related. To understand the link between the CIBIL score and MCLR, let us first understand both these terms in detail.

What is CIBIL score

• CIBIL score is your credit score by which your creditworthiness is rated. Higher the CIBIL score, higher are the chances of the loan approval.
• You can obtain your credit report by filling an online form on CIBIL’s official website. Once you obtain your CIBIL report, you should conduct a CIBIL score check to ensure that it is error-free.
• Mistakes in the CIBIL report can be easily spotted with the help of a credit score check. CIBIL score errors can affect your financial decisions significantly. Therefore, if you spot any errors, make sure that you correct it at the earliest. You can also check CIBIL score for free using our smart financial health check tool.

What is MCLR

• The marginal cost of funds based lending rate (MCLR) is the minimum interest rate below which a bank cannot offer loans to the borrowers. It works as an internal benchmark or reference rate for the bank.
• The MCLR methodology for fixing interest rates on loans was introduced by the Reserve Bank of India with effect from April 1, 2016.
• This new methodology acts as a replacement of the base rate system introduced in July 2010. In simpler terms, all the loans sanctioned and credit limits renewed, with effect from April 1, 2016, would be priced with reference to the Marginal Cost based Lending Rate (MCLR).
• Thus, a lower RBI MCLR will mean a lower interest rate which will reduce the repayment burden significantly. A cut in current MCLR rate will certainly benefit all car loan and home loan borrowers.

MCLR is derived from the following factors:

The conventional base rate system is derived from the average cost of funds and minimum rate of return. However, Marginal Cost of Funds Based Lending Rate (MCLR) is derived from the following factors:

• Marginal cost of funds
• Tenor premium (which pays off the risk on long-term loans)
• Operating expenses
• Cost of Cash Reserve Ratio (CRR)

MCLR basically reflects the Repo Rate set by the RBI. The rate at which commercial banks borrow money from the RBI is known as the repo rate. Thus, if the repo rate decreases, the interest rate at which commercial banks provide loans to their customers will also decrease. Thus, MCLR lending rate is helpful in passing on any changes in policy rates set by the RBI to the banking customer.

The connection between MCLR and CIBIL score

• A good credit score can help you avail a higher loan amount at a reduced rate of interest. Whereas, if you have a poor credit score, lenders may either reject your loan application or charge a comparatively higher interest rate.
• Therefore, if you wish to avail any type of loans, such as a Bajaj Finserv home loan or a car loan on the lowest rates that are based on MCLR, then you should maintain a good CIBIL score.
• Though the two aspects are not related directly, your CIBIL score determines whether you are eligible to get a loan at the MCLR based interest rate.

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