MCLR (Marginal cost of Funds based Lending Rate)

MCLR (Marginal cost of funds based lending rate) is the lowest interest rate that a bank or financial institution  can offer meaning  it cannot offer HOME LOAN interest rates lower than the marginal cost of funds based lending rate. Now renewal of credit limits and sanctioning of loans is done as per MCLR norms and  was introduced in the Indian financial system by the Reserve Bank of India in the year 2016 that  has replaced the base rate system that was introduced in the year 2010. MCLR is closely linked with the repo rate and fund costs of the banks. Thus, if there is a change in the repo rate, it will have an impact on your home loan’s floating rate of interest. If a bank brings down the marginal cost of funds based lending rate, the floating rate of interest associated with your home loan also comes down. This will not be affecting your equated monthly instalments but the tenure of the loan will get impacted.

MCLR is associated with floating rate home loans only. In case the home loan that you opted for comes with fixed rates of interest, MCLR will not affect the home loan. Change in reporate will decide whether you gain or lose with the MCLR. The home loan interest is following a downward trend currently. So, it can prove to be beneficial to switch to MCLR if you are planning to purchase a house.

The marginal cost based lending rates are revised by banks on a monthly basis and is a new technique of levying interest on advances.

MCLR depends on factors like CRR (Cash Reserve Ratio), marginal cost of funds, tenor premium, and operating cost.

It is dependent on the repo rate changes made by the RBI.

Marginal cost of funds based lending rate can be different for different loan it is notified by RBI that Banks must publish marginal cost of funds based lending rate for different tenors.

Main objective to introduce MCLR was to bring  in transparency in the method followed by various banks for the determination of interest rates and Ensuring the availability of bank loan at rates that fair to both lenders and borrowers.