MCLR or Marginal Cost of lending rates is an internal benchmark system followed by financial institutions in India. It was introduced to replace the earlier base rate system so that borrowers could avail the benefits of any reduction in RBI’s repo rate. MCLR rate can be defined as the lowest lending rate below which a financial institution is not allowed to extend credit to borrowers.
Now that you know what is MCLR, you should also know the factors that are considered to calculate the MCLR rate. These are as follows –
Tenure premium –
Credits such as home loans are offered to borrowers for an extended period of 15-20 years. Therefore, these loans are considered high risk by lending institutions, and to that effect, they charge a certain amount from borrowers. Accordingly, one should bear in mind that longer the repayment period, higher the premium amount.
Marginal Cost of Funds –
Lending institutions calculate this amount based on the expenses involved in borrowing from several sources such as fixed deposits, current account, savings account, equity etc. The rate of interest that is applicable to the above source of funds are used to calculate the marginal cost of funds which is included in MCLR.
Operating cost –
All costs involved in extending loans to borrowers are termed as operating costs which are also included while calculating MCLR rate. However, one needs to note that operating costs are different from service charges.
Negative carry on ratio
All scheduled financial institutions are required to maintain a percentage of cash with the central bank, which is known as the cash reserve ratio. Since the financial institution cannot use this fund to earn income or interest, it is considered negative.
Apart from these factors, financial institutions also charge a spread over MCLR rate, which is calculated based on tenure, home loan amount, etc.
So, the interest rate on home loan, linked to MCLR benchmark, is the answer to what is MCLR rate.
Therefore, MCLR based home loan interest rates can vary for each lending institution, since each lender considers different values to calculate the same.
