The marginal cost of funds based lending rate, or MCLR, as it is commonly called, is the minimum interest rate set by the Reserve Bank of India on different types of loans. No bank or non-banking financial companies (NBFCs) can lend a loan with an interest rate that is under the MCLR value. The MCLR acts as an internal lending-rate benchmark for most banks and loan-providing institutes.
More About MCLR
The MCLRwas introduced on April 1, 2016. Prior to that, most loans’ lending rates were determined based on base rate systems. However, under the base rate system, there was no proper regularization on the home loan interest rates. This resulted in many prime customers of banks or NBFCs taking undue advantage of the facility. For instance, suppose the base rate of any particular home loan was 8%, the prime customers used to get the facility at 6%-7% instead. On the other hand, the rest of all the customers had to pay 7% or higher interest for the same. This led to a lot of disparity between the borrowers as well as significant monetary losses for the financial institute.
However, with the implementation of MCLR, these issues were resolved. The banks and other money lending institutes now have to change their interest rates as soon as the repo rate changes. The borrowers now get a fair interest on their home loan depending on their individual risk profile. MCLR also serves the purpose to enable most money-lending institutes to become competitive and improve their worth in the financial market.
MCLR rate in Home Loans
Buying a home is a huge investment these days. In order to manage sufficient funds for buying their dream home, most people, therefore, resort to home loans. However, most home loans are secured loans that require you to provide a collateral against them. Moreover, the amount availed as well as the loan repayment tenure for a home loan is much more as compared to an unsecured type loan (e.g. personal loan). As a result, a borrower has to think of all these parameters and do proper financial planning in order to avoid defaulting on his/her home loan.
At present, the MCLR for home loan lies between a ranges of 9.05% -9.45%. While there might be no significant fluctuations in case of fixed interest home loans, the floating interest rates may vary with respect to a change in the MCLR. This is because the MCLR is linked to the loan provider’s fund costs and repo rates. Thus, if the loan provider increase/decrease the MCLR, the floating interest rate on the home loan will also increase/decrease accordingly.
Borrowers who applied for a home loan after 1st April 2016 are given the loans as per the MCLR mark-up. However, the RBI has also made provisions for borrowers who had already availed a home loan before the implementation of MCLR and had to pay higher interest rates on their home loan. According to RBI guidelines, these home loan borrowers have the option to switch to the new MCLR home loan interest rates or continue with their existing base rates. This flexibility offers a chance to avoid any bias related to home loan interest rates and EMI payments between new and old borrowers.
How is MCLR Calculated?
The Reserve Bank of India has given the following formula to calculate the MCLR-
MCLR = Marginal borrowing cost x 92% + return on the net worth x 8%
However, while thinking about the MCLR calculation, it is important to know how banks or NBFCs provide the loan amount. Most loan providers manage this amount through their capital sources such the various savings and fixed deposits, current accounts, recurring deposits, etc. Depending on whatever the interest rate is provided on these accounts as well as the gathered equity, a borrower can estimate the likely MCLR that would be levied with his/her home loan.
Moreover, apart from these financial sources, the RBI has mandated all loan providers to maintain a cash reserve ratio that must not go down below 4%. In rare cases, most financial institutes are offered a concession to get an allowance as “Negative Carry”. Apart from that, banks and other financial institutes must also take care of their operational costs such as paying employee salaries, managing branches, expenses for customer convenience, etc. Thus, all these factors help determine the MCLR on your home loan. The deadlines to disclose the MCLR by banks may vary as the bank deems fit- overnight, monthly, quarterly or yearly.
Borrowers who apply for home loan at a floating interest rate can benefit the maximum from the MCLR. Also, depending on the amount of deposit balances and the cash reserve ratio of a particular bank, the MCLR will vary. Thus, at the time of approaching a loan provider for a home loan, a borrower can research these aspects to help gauge the MCLR on his/her home loan interest rate. Another thing to keep in mind is that for earlier base rates, the loan tenor was not an important parameter. However, with the implementation of MCLR, banks and other financial institutes now consider the tenor premium as one of the deciding factors. Thus, borrowers wanting to avail home loans with long-term horizons are likely to be charged more under the MCLR.
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