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What is MCLR? A Complete Guide

Updated on: 24 Jun 2022 // 33 min read // Home Loans
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MCLR full form is the marginal cost of funds based lending rate, and it refers to the internal reference of the bank's fixed rate by RBI (Reserve Bank of India). It assists banks in defining the minimum rate on various credit types. 

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Banks are not permitted to lend to individuals below MCLR. Otherwise, they will witness stringent regulatory action. Only in exceptional cases they can lend their borrowers below MCLR with prior consent from RBI. Lending rates get determined based on the incremental or marginal cost of arranging every rupee for loan borrowers. 

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On 1st April 2016, RBI had replaced the system of the base rate used for determining rates with the MCLR system. Those borrowers who were provided loans before 1st April 2016  are under base rate and BPLR (Benchmark Prime Lending Rate) rate and can choose to switch to the MCLR in case they consider it to be beneficial for them. 

Here, in this article, we will provide answers to constantly googled questions regarding MCLR- what is MCLR, what is MCLR rate, MCLR meaning, MCLR full form, MCLR means etc. We will even list the difference between what is MCLR and what is a base rate. 

MCLR Meaning

MCLR means a reference rate even called the internal benchmark for the banks, and MCLR full form is the marginal cost of funds based lending rate. MCLR defines the procedure, which is put into use for determining the minimum loan rate. MCLR was initially introduced in 2016 by the RBI. This system replaced the old base rate system, which was launched in 2010. Thus, the credit limit renewal and loan sanctioning both are performed based on the MCLR norms. 

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Note that MCLR is the lowest loan rate that any lender or bank can offer. Most of the banks cannot offer rates lower than MCLR. However, in exceptional cases, if permitted by the RBI, then only the lender can provide rates below MCLR. 

What MCLR means in terms of a home loan?

MCLR is very closely related to the fund costs and repo rate of banks. Thus, in case there is any repo rate change, it even impacts the home loans floating rate. If the bank pulls down the MCLR, the home loan's floating rate even comes down. 

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Guidelines by RBI about MCLR:

  • Fixed interest rate home loans will not get impacted by the MCLR.
  • The deposit balance & other borrowings are factored in when computing the fund’s marginal cost.
  • Banks should publish their MCLR for the different tenures.
  • MCLR, as mentioned on the date of sanction, will remain the same till the next reset date.

Current MCLR Rates for Top Banks

BanksOvernight (%)1 month (%)3 month (%)6 month (%)1 year (%)2 years (%)3 years (%)
State Bank of India6.856.856.857.157.207.407.50
HDFC Bank7.157.207.257.357.507.607.70
ICICI Bank7.307.307.357.507.55--
Axis Bank7.557.557.657.707.757.857.90
Punjab National Bank6.756.806.907.107.40-7.70
Citibank4.844.855.355.706.05--
IndusInd Bank8.108.158.408.709.009.359.50
RBL Bank7.857.958.258.659.05--
Canara Bank6.656.656.957.357.40--
IDFC First7.857.858.058.358.65--
Bank of India6.707.057.107.207.35-7.70
Nainital Bank7.107.107.157.257.407.708.10
Jammu & Kashmir Bank6.756.857.057.357.507.958.00
Bandhan Bank8.038.038.038.689.169.7110.05
Union Bank of India6.706.857.107.257.457.507.50
UCO Bank7.057.207.307.557.65--
Punjab & Sind Bank6.806.907.007.20 7.50--
Bank of Baroda6.807.207.257.357.50--
Federal Bank of India8.058.108.158.258.30--
IDBI Bank6.906.957.157.407.808.358.85
Indian Overseas Bank6.856.857.407.407.457.457.45
As of 10th June 2021

Difference Between MCLR Rate and Base Rate

Both MCLR & base rates offered by the lenders might seem similar at first glance. Both are based on similar principles & are implemented with the same objective. But there are major factors that distinguish between MCLR and base rate.

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Firstly, the base rate is based on the average funds cost, while MCLR is based on the marginal/incremental funds cost. Base rate is calculated by factoring in the minimum return rate or profit margin. However, MCLR gets calculated by factoring in the tenure premium. Operating costs and the costs required for maintaining the cash reserve ratio even governs the base rate. Repo rate, operating costs, deposit rates, and the expense incurred at maintaining the cash reserve ratio controls the MCLR. 

How to Calculate MCLR Rate?

For calculating the MCLR, you should factor in all borrowing sources for financial institutions. Financial institutions borrow from numerous sources, which include current accounts, fixed deposits, savings accounts etc. The interest rate in such borrowing sources can be used by one for estimation of the marginal borrowing cost. Note that the source of a financial institution's fund is not just borrowing; it is even equity (infused or retained earnings). Hence, equity returns can even be expected. 

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The formula prescribed by RBI for MCLR calculation is:

MCLR = Marginal borrowing costX92 percent + net worth returnX8 percent

Banks should even maintain a 4% cash reserve ratio. Remember, in such deposits; zero interest gets earned by banks. As per MCLR, banks can take up a few allowances known as Negative Carry on the CRR. Moreover, operating expenses should be factored in and taken good care of. There are numerous costs of financial institutions that involve opening branches, raising funds, paying of salary to their staff, employees etc. Such expenses are not charged to the financial institution's customers. Lastly is the tenor premium or discount. The interest rate's reset is known as a tenor. This is directly proportional to the reset period; that is, the tenor is more if the reset period is more. 

MCLR is based on:

  • Operating cost of bank
  • Tenor premium
  • Marginal funds cost
  • Negative carry on the Cash Reserve Ratio

As per the regulations by RBI, banks are supposed to issue their minimum Home Loan interest rate or the MCLR for numerous tenures monthly. Such maturities/tenures involve overnight, 1 month, 3 months, 6 months, 1 year and other tenures which the bank might want to publish. You can figure out the MCLR of various banks by simply visiting their websites. 

Why MCLR?

You may be wondering why did the central bank shift the banks to the MCLR system when the base rate/BPLR was working just fine? RBI was not pleased with the base rate system's effectiveness. This is the reason why RBI decided to shift banks to a new system where the borrowers & the country's economy both can benefit. 

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RBI realized that the system of base rate wasn't sensitive in case of changes in any policy rates. And a change in policy rate is crucial for the right implementation of monetary policies. Note that there was zero uniform system prevalent in the country until the introduction of the MCLR system. All the financial institutions calculated the base rate basis numerous methodologies depending upon their discretion. While few used the average funds' costs, others employed the blended funds' cost & marginal funds cost tactic.

One of the most crucial reasons why RBI shifted the banks to the MCLR system was to make sure swifter and simpler transmission of the policy rates into the banks' lending interest rates. Thus, MCLR was introduced because of the listed reasons: 

  • Enhance RBI policy rate transmission into the nation’s banking system
  • Ameliorate transparency in the system used by financial institutions to fix the loans' interest rates.
  • Make sure fairness in the credit rates for both the borrowers and banks.
  • Provide competitive benefits to the banks & even boost their long term value and at the same time contribute to the nation’s economic growth.

FAQs

What is MCLR?

MCLR means Marginal Cost of Funds Based Lending Rate. It is the minimum rate below which the banks cannot lend their borrowers except in specific situations.

What is the difference between MCLR and base rate?

MCLR is determined by the current incremental/marginal cost of funds, while average funds cost plays a crucial role in estimating the base rate. And the calculation of MCLR is done based on the tenor premium, wherein the tenor gets defined as the reset period for rates. Also, the tenor is directly proportional to the reset period, which means if the tenor increases, the reset period even increases. However, the base rate gets calculated by factoring in the return margin or minimum profit. 

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What is the purpose of MCLR introduced by RBI?

MCLR was introduced with the goal to ameliorate transmission of the policy rates into banks lending rates.

What is the MCLR of HDFC Bank?

HDFC bank’s current MCLR for overnight is 7.15%, 1 month is 7.20%, 3 months is 7.25%, 6 months is 7.35%, 1 year is 7.50%, 2 year is 7.60% and 3 year is 7.70%.

What is the current MCLR rate of ICICI?

ICICI bank's current MCLR for overnight is 7.30%, 1 month is 7.30%, 3 months is 7.35%, 6 months is 7.50%, and 1 year is 7.55%.

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