Marginal Cost of Funds based Lending Rate or MCLR is an internal benchmark used by financial institutions in India. It determines the minimum interest rate which can be offered against advances, except the cases determined by RBI. Reserve Bank of India introduced this MCLR rate on 1st April 2016, replacing the old base rate system.
Earlier most financial institutions were slow to change the interest rates of different loans, including home loan, following the rate changes made by RBI.
Following are some facts about MCLR.
- Under MCLR regime, it is mandatory for financial institutions to declare their overnight, one month, three months, six months, one year, two-year interest rates every month.
- Lenders offer all kinds of loans at MCLR rate, both for fixed and floating interest rates.
- MCLR is related to actual deposit rate that is calculated using four components. It includes tenure premium, marginal cost of funds, operating costs and negative carry on account of reserve cash ratio.
- Since this benchmark is closely linked to tenure of the loans, the lenders determine MCLR internally assessing the remaining period of the repayment of a particular loan.
Therefore, in this article, MCLR and its effects on loan are demystified, and prospective borrowers should learn about it before approaching any lender. They also should keep themselves updated about the latest MCLR rate of their respective lender to get the competitive interest rate.
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