BAJAJ FINSERV DIRECT LIMITED
Housing Insight

MCLR Rate - What Is it & How Does it Work?

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Pradnya Ranpise

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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.

What is MCLR

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.

MCLR Rate Meaning

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%.

MCLR Rates of Bajaj Markets' Home Loan Partners (June 2025)

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

What is Base Rate

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.

Difference Between MCLR and Base Rate

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

Guidelines for MCLR

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

How is MCLR Calculated

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:

Marginal Cost of Funds

Covers the interest banks pay on fresh deposits and the expected return on their own capital when lending money.

Operating Costs

Includes daily business expenses like staff salaries, branch maintenance, and loan processing that impact the cost of providing loans.

Tenure Premium

An extra charge banks add for longer-term loans to cover the higher risk of lending over extended periods.

Negative Carry on CRR

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.

What Impact Does the MCLR Have

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.

What Are the Deadlines to Disclose the Monthly MCLR Rate

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.

Key Financial Terms Associated with MCLR

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

Conclusion

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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Hi! I’m Pradnya Ranpise
Blogger

Pradnya has over 5 years of experience in content marketing, with certifications from both SEMrush Academy and HubSpot Academy. Having worked across multiple industries, she has now honed her focus on the finance sector, covering topics such as insurance, loans, investments, and payments. She is known for breaking down complex financial topics into simple, clear content that empowers readers to make informed decisions.With a genuine passion for helping people understand their finances, Pradnya’s expertise shines through her work, as she delivers trustworthy, authoritative content backed by real industry knowledge.

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