MCLR
MCLR is an internal benchmark rate that Indian commercial banks calculate and publish, as mandated by the RBI effective April 2016. It replaced the earlier Base Rate system and is intended to make lending rates more responsive to RBI policy rate changes.
Components
- •Marginal Cost of Funds — weighted average cost of new borrowing (not the average cost of the entire portfolio)
- •Negative Carry on CRR — cost of maintaining reserves with RBI on which no interest is earned
- •Operating Costs — cost of providing the loan product
- •Tenor Premium — additional risk for longer-duration loans
MCLR Tenors
Banks publish MCLR for overnight, 1-month, 3-month, 6-month, 1-year, 2-year, and 3-year tenors. The 1-year MCLR is most widely used for home and retail loans.
Loan Rate
Loan Rate = MCLR + Spread (markup). The spread reflects credit risk and is fixed at loan origination. For floating-rate loans, the rate resets at intervals (typically 6 or 12 months).
MCLR vs. EBLR
Since October 2019, RBI mandated new floating-rate retail loans be linked to an External Benchmark Lending Rate (EBLR) — typically the repo rate. MCLR continues for existing loans. EBLR-linked loans transmit policy rate changes more quickly than MCLR-linked loans, which may take 6–12 months to reflect a change.