MCLR Rate

On April 1, 2016, the Reserve Bank of India (RBI) introduced a new set of guidelines that commercial banks must follow while deciding the lending rates for their borrowers. These guidelines, known as the Marginal Cost of Funds-based Lending Rate (MCLR), were introduced with the intention of ensuring that lenders pass on the benefit of rate cuts to clients. The MCLR replaced the base rate system that was in place since July 1, 2010. This article will tell the reader everything they must know about the MCLR system as well as its implications.

Disclaimer: Please visit the official website of the lender for more details.

As per the guidelines of the MCLR Rate system, a change in the repo rate is also supposed to impact the interest rate of home loans if their borrowing rate is calculated as per the floating rate system. Simply put, if the repo rate goes down, so will the interest rate of such home loans and vice-versa. One must keep in mind that such a change will not affect the EMI amount that the borrower will pay, but it will directly impact the length of their repayment tenure.

Firstly, one must keep in mind that the MCLR rate of every bank will depend on the following factors:

• Repayment tenure premium

• Operating costs incurred by the bank

• Negative carry on Cash Reserve Ratio (which is typically 4% of the money deposited by the customers of a bank in the accounts opened with them), and

• Marginal cost of funds (the expenses incurred by the bank to gain funding for meeting operational costs)

 

Once all of the above-mentioned variables have been determined, the individual can arrive at the financial institutions’ MCLR rate. The RBI prescribes the following formula for the same:

 

Marginal cost of funds = Marginal borrowing cost x 92% + return on the net worth x 8%

The guidelines set by the apex bank in connection to the MCLR system are as follows:

• Fixed rate-based home loans should remain unaffected by changes in the MCLR.

• Lending institutions must compulsorily publish the MCLR rate for varying repayment tenures.

• Banks must take their deposit balances as well as borrowings into account while calculating the MCLR rate.

• The applicable MCLR on the sanctioned date of the floating house loan interest rate will remain the same until the next reset date. Reset dates are specified in the repayment terms agreement shared with the borrowers.

The difference between the MCLR rate and the base rate are as follows:

One can easily make the switch from a base rate housing loan to the one that attracts interest as per the MCLR rate by simply making a request to the bank in writing. Some banks may charge the borrowers for the facility, while some may help the borrowers make the switch for no additional cost. If the banks are charging a fee for the facility, the borrower must take the same into account and decide whether or not making the switch will prove to be beneficial for them in the long run. One must note that if the borrower does convert, he or she stands a chance to save lakhs of rupees in the form of reduced interest payments over the course of their repayment tenure.