Financial institutions in India determine their lending rates based on several vital parameters. Among them, MCLR rates, introduced by the Reserve Bank of India from April 1st, 2016, is one of the primary factors that that lending institutions need to consider while determining their lending rates against a range of products, including home loans.
Besides lending institutions, home loan borrowers should also know about this rate in detail to facilitate easy repayment of their loans.
What is MCLR rate?
Marginal Cost Lending Rate or MCLR is a tenure-based internal benchmark for lending rates as put forth by lending institutions. It is, in essence, the rate below which a financial institution cannot lend to borrowers.
Under the guideline of RBI, all financial institutions ought to declare their overnight, 1-month, 3-month, 6-month, 1-year and 2-year interest rates. It also implies that if a borrower has opted for a 6-month tenure loan, the interest rate will alter accordingly after that particular period.
Moreover, MCLR rates depend primarily on the following factors.
- Tenure premium
- Operational cost
- Marginal cost of funds
- Negative CRR
Financial institutions also add a “spread” on top of MCLR rates to determine their lending rates.
Nevertheless, it is also vital to know how to calculate this rate to make the most of this financial tool.
How to calculate MCLR rates?
RBI has introduced the below-mentioned formula to calculate MCLR rates.
Marginal cost of funds = (92% x marginal borrowing cost) + (return on net worth x 8%)
It allows the home loan borrowers to calculate the MCLR rates to avail an idea about the interest rates on their loans.
