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If you’ve ever taken a home loan, auto, or personal loan in India, the term MCLR rate has likely appeared in your paperwork. But what does it really mean, and how does it affect you? Understanding the MCLR rate meaning can help you make better borrowing decisions and avoid unnecessary interest costs. From how banks calculate it to the role it plays in setting your loan’s interest rate, every detail matters. You’ll also discover how the current MCLR influences your EMIs. Don’t miss out—this knowledge could help you save thousands on your next loan decision.
MCLR stands for Marginal Cost of Funds-Based Lending Rate. It is the lowest interest rate a bank can offer you for a loan. The Reserve Bank of India (RBI) introduced the MCLR system in April 2016 to make loan pricing more transparent and fairer for borrowers.
Before MCLR, banks followed the base rate system, which was slower to reflect changes in RBI policy. MCLR fixed this issue by linking loan rates more closely to the bank’s actual cost of funds. This includes the cost banks pay on deposits and money borrowed from other sources.
MCLR changes from time to time, based on the bank’s funding costs. This means your loan rate also changes faster when the RBI updates its policy rates. As a result, you benefit sooner when rates go down—and understand more clearly why your interest rate changes.
The MCLR rate meaning is easy to understand. It is the base rate that banks use to decide the interest you will pay on a loan. Every bank sets its own MCLR, and it can change every month. MCLR is not the same for all loans. It depends on how long the loan is for. Banks usually have different MCLR rates for overnight, one-month, six-month, and one-year loans, and even longer.
For example, if a bank’s one-year MCLR is 8% and your loan has a 0.50% spread, your loan interest rate will be 8.50%.
Lender |
Overnight MCLR |
1-Month MCLR |
6-Month MCLR |
1-Year MCLR |
3-Year MCLR |
Notes |
|---|---|---|---|---|---|---|
Bajaj Housing Finance |
NA |
NA |
NA |
NA |
NA |
Typically uses Base Rate; not MCLR-linked |
PNB Housing Finance |
8.25% |
8.30% |
8.65% |
8.80% |
9.10% |
MCLR rates effective from August 1, 2024 |
Home First Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Primarily uses PLR (Prime Lending Rate); not MCLR-linked |
ICICI Bank |
8.45% |
8.50% |
9.00% |
9.10% |
Not Published |
MCLR rates effective from May 2025 |
LIC Housing Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Uses LHPLR (LIC Housing Prime Lending Rate); not MCLR-linked |
Shubham Housing Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Primarily uses PLR; not MCLR-linked |
Truhome Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Formerly Shriram Housing Finance; uses PLR; not MCLR-linked |
India Shelter Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Uses internal cost of funds; not MCLR-linked |
Kotak Mahindra Bank |
8.65% |
8.70% |
9.00% |
9.15% |
9.25% |
MCLR rates effective from May 2025 |
L&T Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Uses internal benchmark rates; not MCLR-linked |
Vridhi Home Finance |
Not Published |
Not Published |
Not Published |
Not Published |
Not Published |
Uses internal cost of funds; not MCLR-linked |
Sammaan Capital |
- |
- |
- |
- |
- |
Uses internal benchmark rates; not MCLR-linked |
South Indian Bank |
8.65% |
8.70% |
9.00% |
9.15% |
9.25% |
MCLR rates effective from May 2025 |
The base rate was the minimum interest rate banks could offer for loans before the MCLR system began. It was introduced by the Reserve Bank of India in 2010 to prevent banks from lending at very low rates, which could harm borrowers and the economy.
The base rate was calculated using several cost factors. These included the interest banks paid on deposits, their operating and administrative costs, and a set profit margin. However, it did not fully reflect how much it cost the bank to raise new funds. Because of this, the base rate was slow to react when the RBI changed its policy rates.
This delay meant that even when the RBI reduced the repo rate, your loan interest might not come down quickly. The system lacked flexibility and did not pass on rate benefits to borrowers as fast as expected. That is why the MCLR system replaced it in 2016—to make loan rates more transparent and responsive.
Understanding the difference between the MCLR rate and the base rate helps you choose the right loan. MCLR offers more transparency and faster rate changes, while the base rate was slower and less responsive. Here is a simple comparison to help you see how the two systems differ:
Feature |
Base Rate |
MCLR Rate |
|---|---|---|
Meaning |
Minimum rate based on average cost of funds |
Minimum rate based on marginal cost of funds |
Start Date |
Introduced by RBI in July 2010 |
Introduced by RBI in April 2016 |
Cost Basis |
Based on average cost of existing deposits |
Based on current deposit rates and borrowing costs |
Components Used |
Includes operating costs and the cost of maintaining CRR |
Includes repo rate, deposit rates, CRR cost, and operating costs |
Response to Repo Rate |
Does not respond quickly to RBI’s repo rate changes |
Responds quickly to repo rate changes, allowing faster EMI adjustments |
Rate Changes |
Can be revised quarterly by the bank |
Can change monthly, but your loan rate adjusts only on your loan’s reset date |
Loan Tenure Sensitivity |
Same rate for all tenures |
Different MCLR for different loan tenures (e.g. 1-month, 6-month, 1-year) |
Transparency |
Less transparent; changes are hard to track |
More transparent; borrowers can track and compare MCLR rates easily |
Borrower Benefit |
Slower rate reduction when RBI cuts policy rates |
Faster benefit passed to you when RBI reduces repo rates |
Here are the key MCLR rules set by the Reserve Bank of India that help protect your interests and bring more clarity to loan pricing:
Banks must publish the MCLR rate for different loan tenures every month
MCLR is the minimum rate for all new floating-rate loans
A spread must be added to MCLR based on your credit risk and loan type
Your loan’s interest rate must be reset at least once a year
The reset date is fixed and does not change with monthly MCLR updates
Banks may revise their MCLR every month based on funding costs
Revised MCLR takes effect from the first day of the next month
The MCLR applicable on loan sanction day stays until the next reset date
Fixed-rate loans are not impacted by changes in MCLR
Banks must display the current MCLR on their website and in branches
If needed, banks must use the RBI’s benchmark deposit rate to calculate MCLR
MCLR is calculated using a formula that reflects the actual cost banks pay to lend money. It ensures that loan pricing is more accurate, fair, and transparent. Each bank calculates its MCLR based on four key components. These costs may vary between banks, so MCLR rates are not the same everywhere. Here are the main factors used to calculate MCLR:
Covers the interest banks pay on fresh deposits and the expected return on their own capital when lending money.
Includes daily business expenses like staff salaries, branch maintenance, and loan processing that impact the cost of providing loans.
An extra charge banks add for longer-term loans to cover the higher risk of lending over extended periods.
Refers to the loss banks face as CRR funds kept with RBI earn no interest but still carry a funding cost.
Banks use these factors to calculate different MCLR rates for various loan periods, such as overnight, one-month, or one-year loans. Although MCLR is reviewed monthly, your loan interest changes only on the reset date, so it’s important to know your reset cycle and compare rates before borrowing.
The MCLR rate plays a big role in deciding how much interest you pay on your loan. Changes in this rate can increase or decrease your EMIs. Here is how it affects you:
Impact Area |
Effect of Lower MCLR |
Effect of Higher MCLR |
|---|---|---|
Loan Interest Rate |
Your loan interest goes down |
Your loan interest goes up |
Monthly EMIs |
EMIs become lower after the next reset date |
EMIs become higher after the next reset date |
Cost of Borrowing |
Borrowing becomes cheaper, helping you save money |
Borrowing becomes costly, increasing your total repayment |
Spending Power |
More money left for other needs or investments |
Less money for savings or spending |
Business Impact |
Reduces interest costs, encouraging more investment |
Increases expenses, reducing business profitability |
Rate Adjustment Speed |
Responds faster than base rate when RBI changes repo rate |
Adjusts quickly, making costlier loans more visible to borrowers |
If your loan is linked to the current MCLR rate, these changes directly affect your repayments. While a lower MCLR saves you money, a higher one increases your monthly outgo. That’s why tracking MCLR changes helps you stay prepared and make smarter financial choices.
Banks must publish their MCLR rate every month for different loan tenures—such as overnight, one-month, three-month, and one-year. This is usually done on a fixed date, like the first or last working day of the month.
This monthly disclosure helps you stay informed about the current MCLR rate, allowing you to plan your EMIs and loan choices better. You can find these rates on your bank’s website or by visiting a branch.
Banks can offer loans with fixed or floating interest rates. However, for floating-rate loans, the lending rate cannot go below the declared MCLR.
Some loans are exempt from the MCLR system. These include:
Loans against fixed deposits
Loans for bank staff
Special government-backed loans like those under Jan Dhan Yojana
Fixed-rate loans with terms longer than three years
Staying updated with your bank’s MCLR helps you avoid unexpected rate changes and make smarter borrowing decisions.
Understanding these terms will help you make better decisions and track how your loan interest is set:
Spread: An extra margin added to the MCLR based on your credit score and the bank’s risk assessment
Reset Date: The fixed date when your loan interest rate is reviewed and possibly updated by the bank
Tenure Premium: An additional rate banks charge for longer loan periods to cover the higher lending risk
Base Rate: The older benchmark rate system used before MCLR was introduced in 2016
Floating Rate: A loan interest rate that can change during the loan period based on the MCLR or other benchmarks
Fixed Rate: A loan interest rate that stays constant for a specific period, regardless of market changes
Repo Rate: The interest rate charged by the RBI when it lends money to banks, which in turn influences the MCLR indirectly
The MCLR rate system helps you understand how banks set your loan interest. It also makes loan pricing fairer and more transparent. When rates go down, your EMIs can reduce faster. This gives you the chance to save money over time.
If you plan to take a loan, knowing how MCLR works puts you in control. Always check the current MCLR rate, ask about your reset date, and know your spread. These small steps can help you avoid surprises and make better borrowing choices. Staying informed is the best way to manage your money smartly.
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