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What is MCLR?

On April 1, 2016, the Reserve Bank of India (RBI) introduced a new set of guidelines that commercial banks must follow while deciding the lending rates for their borrowers. These guidelines, known as the Marginal Cost of Funds-based Lending Rate (MCLR), were introduced with the intention of ensuring that lenders pass on the benefit of rate cuts to clients. The MCLR replaced the base rate system that was in place since July 1, 2010. This article will tell the reader everything they must know about the MCLR system as well as its implications.

Compare Updated MCLR Rates of our Partners Effective From April 2022

Lender

3 years

2 years

1 year

6 months

3 months

1 month

Overnight

PNB Bank MCLR

7.60%

NA

7.30%

7.00%

6.80%

6.70%

6.65%

UBI Bank MCLR

7.40%

7.35%

7.20%

7.05%

6.90%

6.70%

6.60%

ICICI Bank MCLR

0.00%

0.00%

7.25%

7.20%

7.05%

7.00%

7.00%

 

What is MCLR Rate in Home Loan

As per the guidelines of the MCLR Rate system, a change in the repo rate is also supposed to impact the interest rate of home loans if their borrowing rate is calculated as per the floating rate system. Simply put, if the repo rate goes down, so will the interest rate of such home loans and vice-versa. One must keep in mind that such a change will not affect the EMI amount that the borrower will pay, but it will directly impact the length of their repayment tenure.

How to Calculate MCLR Rate

Firstly, one must keep in mind that the MCLR rate of every bank will depend on the following factors:

  • Repayment tenure premium

  • Operating costs incurred by the bank

  • Negative carry on Cash Reserve Ratio (which is typically 4% of the money deposited by the customers of a bank in the accounts opened with them), and

  • Marginal cost of funds (the expenses incurred by the bank to gain funding for meeting operational costs)

Once all of the above-mentioned variables have been determined, the individual can arrive at the financial institutions’ MCLR rate. The RBI prescribes the following formula for the same:

Marginal cost of funds = Marginal borrowing cost x 92% + return on the net worth x 8%

RBI Guidelines for the MCLR

The guidelines set by the apex bank in connection to the MCLR system are as follows:

  • Fixed rate-based home loans should remain unaffected by changes in the MCLR.

  • Lending institutions must compulsorily publish the MCLR rate for varying repayment tenures.

  • Banks must take their deposit balances as well as borrowings into account while calculating the MCLR rate.

  • The applicable MCLR on the sanctioned date of the floating house loan interest rate will remain the same until the next reset date. Reset dates are specified in the repayment terms agreement shared with the borrowers.

Difference Between MCLR Rate and Base Rate

The difference between the MCLR rate and the base rate are as follows:

MCLR Rate

Base Rate

MCLR rate is a lending rate system put into place by the RBI so that the borrowers enjoy the benefits of the change in the repo rate.

Base rate is the minimum rate at which banks lend their financial resources to the borrowers.

The MCLR is determined by the CRR of the bank, their operational costs, their tenure premium, and the tenure premium.

The base rate of a lender is contingent on their profitability, their bank deposit rates, and operational costs.

The MCLR rate changes as and when the RBI changes the repo rate.

The base rate is not contingent on the repo rate changes made by the RBI.

MCLR rates can be different for various loan repayment tenures.

The base rate of a bank remains constant for loans of all repayment tenures, but the lenders can change the same every quarter.

 

How to Convert Base Rate Home Loan to MCLR Home Loan

One can easily make the switch from a base rate housing loan to the one that attracts interest as per the MCLR rate by simply making a request to the bank in writing. Some banks may charge the borrowers for the facility, while some may help the borrowers make the switch for no additional cost. If the banks are charging a fee for the facility, the borrower must take the same into account and decide whether or not making the switch will prove to be beneficial for them in the long run. One must note that if the borrower does convert, he or she stands a chance to save lakhs of rupees in the form of reduced interest payments over the course of their repayment tenure.

FAQs on MCLR Rate

✔️What is the benefit of MCLR?

As a home loan borrower, you can benefit from the MCLR rate regime if the Reserve Bank of India (RBI) cuts interest rates. As and when they do, the benefits of the same will be passed on to you by the lender bank/NBFC, which can help you save lakhs of rupees you would have otherwise paid as interest.

✔️Is MCLR decided by the RBI?

Yes, the MCLR is decided by the RBI. This is a rate which is used internally by banks to decide the interest rate they will levy on their borrowers.