MCLR (Marginal Cost of Funds Based Lending Rate)
Prior to 1st April 2016, if you went to a bank to avail of a loan, you would be charged an interest rate calculated on a base rate. However, the base rate system wasn’t regarded as very transparent as it often delayed in timely transferring the rate cut benefits to customers. It was then the Reserve Bank of India revised its policy and introduced a system named MCLR or Marginal Cost of Funds Based Lending Rate. This heralded much-needed reforms in the lending structure of banks and financial institutions.
What is MCLR Full Form?/MCLR Meaning
In essence, MCLR or Marginal Cost of Funds-based Lending Rate is the minimum rate at which a bank can lend to its customers on certain loans. MCLR is an internal benchmark lending rate used by banks to determine the interest rate for various loans. The MCLR system was introduced by the Reserve Bank of India in 2016 to improve the transmission of policy rate changes to the lending rates offered to customers by banks.
Under the MCLR system, banks are required to calculate their lending rates based on the marginal cost of funds, which takes into account the current cost of borrowing, the interest paid on deposits, and other factors. This helps to ensure that lending rates are more responsive to changes in the RBI policy rates and market conditions, leading to greater transparency and efficiency in the banking system.
Current MCLR Rates
Here are the current MCLR rates for leading banks as on March 17, 2023, across tenures.
| Bank name | 3 years | 2 years | 1 year | 6 months | 3 months | 1 month | Overnight |
| Axis Bank MCLR rate | 8.95% | 8.90% | 8.80% | 8.75% | 8.70% | 8.60% | 8.60% |
| SBI Bank MCLR rate | 8.70% | 8.60% | 8.50% | 8.40% | 8.10% | 8.10% | 7.95% |
| HDFC Bank MCLR rate | 9.05% | 8.95% | 8.85% | 8.70% | 8.60% | 8.55% | 8.50% |
| ICICI Bank MCLR rate | – | – | 9.20% | 9.15% | 9.10% | 9.00% | 9.00% |
| PNB MCLR rate | 8.80% | – | 8.50% | 8.40% | 8.20% | 8.10% | 8.00% |
| Bank of Baroda MCLR rate | – | – | 8.55% | 8.40% | 8.30% | 8.20% | 7.90% |
| IndusInd Bank MCLR rate | 8.95% | 8.90% | 8.60% | 8.50% | 8.35% | 8.30% | 8.25% |
How is MCLR Calculated?
There are various factors that go into the calculation of MCLR:
1. Operating Expenses
The operating expenses incurred by the bank while extending the loan are covered by this rate. This may include the cost of raising funds, stamp duty, legal charges, printing costs, and more.
2. Negative Carry-On CRR
Cash Reserve Ratio (CRR) is the specified percentage of total deposits that the bank must keep in its reserves. This amount cannot be extended as a loan, and thus, earns no returns. Because of the nil returns, the cost of these funds exceeds what can be earned on them, giving a negative figure.
3. Tenure
MCLR is calculated by keeping in mind the tenure of the loan, which is the duration for which the loan has been taken. As the tenure increases, so does the risk involved. To cover this risk, the banks charge a premium, which is also taken into account when determining the MCLR interest rate.
4. Cost of Borrowings
Based on the cost of borrowings, the RBI has determined the following formula for calculating MCLR: MCLR = (Marginal borrowing cost * 92%) + (Return on net worth * 8%)
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What is the Effect of Implementing MCLR?
The previously-used base rate system lacked transparency to the customers and was incapable of responding quickly to policy changes made by the RBI. However, the introduction of MCLR in 2016 has led to the establishment of a uniform rate structure in the country. With this, customers could seamlessly compare rates offered by different banks.
Moreover, under the MCLR regime, banks are allowed to price their loans independently, which gives them the flexibility to change their lending rates per the RBI’s monetary policy. This is done promptly with the adjustments in policies, and delays are avoided.
The MCLR does not just benefit the borrowers, but it provides a competitive advantage to lenders, all of which ultimately boosts the country’s economic growth.
What are the RBI Guidelines on MCLR?
RBI has prescribed the following guidelines regarding MCLR:
- The reset period for MCLR should be at least once a year. This must be done even if there has been no change in the marginal cost of funds.
- The banks are allowed to review and reset their MCLR once a month.
- The new MCLR will be effective from the 1st day of the following month.
- The banks have to mandatorily display the MCLR on their website as well as at their branches.
- If a bank doesn’t have sufficient data regarding its marginal cost of funds, it has to use the RBI’s benchmark deposit rate for that particular tenure to calculate the MCLR.
- The MCLR does not affect home loans that charge interest on a fixed rate basis. For home loans on a floating interest rate basis, the MCLR of the day when the loan is sanctioned is taken till the time it is reset.
What are the Deadlines to Disclose the Monthly MCLR?
The banks must display the monthly MCLR on their website as well as at their branches before the last working day of every month. This is a crucial guideline issued by the RBI that must be complied with.
If your bank doesn’t disclose the MCLR, then it is violating the RBI guidelines. You can lodge a complaint with the specified banking personnel in this case.
Difference between MCLR and Base Rate
| Criteria | MCLR | Base Rate |
| Meaning | Minimum interest rate that a bank can charge to its customers | Minimum interest rate below which a bank is not allowed to lend |
| Repo Rate Impact | Yes | No |
| Basis | Based on marginal cost of funds | Based on average cost of funds |
| Calculation | Calculated by considering the tenure premium | Calculated by considering the profit margin |
| Credit Risk Premium | Yes | No |
| Reset Period | Mostly Annual | Quarterly |
Final Word
The RBI’s guidelines on MCLR are quite helpful in ensuring that banks lend at rates that are based on the marginal cost of funds. This makes the system more transparent and effective. The customers also benefit as they can now compare lending rates offered by different banks easily. Do make sure to check the MCLR before taking a loan from a bank. It will allow you to get the best possible deal while taking out a loan.
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FAQs
MCLR or the Marginal Cost of funds based Lending Rate is a rate specified by RBI which serves as the minimum rate below which banks cannot extend a loan, except in certain cases.
RBI introduced MCLR to bring in more transparency to the way lending rates are determined by banks. Another reason was to allow seamless and quick adjustment of the lending interest rate based on policy changes by the RBI.
MCLR interest rate is based on the tenure of the loan, the cost of funds, operating expenses of the bank, and the negative carry on the CRR.
RBI has prescribed the following formula for calculating MCLR:
MCLR = (Marginal borrowing cost * 92%) + (Return on net worth * 8%)
The banks must disclose the monthly MCLR by the last working day of every month. This must be displayed on their website and bank branches.
Yes, all banks are required to link their loans to MCLR with effect from 1st April 2016. This is in line with the RBI’s guidelines that were issued in December 2015.
