MCLR, or Marginal Cost of fund based Lending Rate, acts as the benchmark lending rate for financial institutions across India. Announced on 1st April 2016, it replaced the base rate applicable for the new borrowers.
MCLR rate is calculated based on four components, namely – operating cost along with tenor premium, marginal cost of funds, and negative carry on account of cash reserve ratio (CRR).
MCLR-linked credits are usually reset after every year, so borrowers will have a revised rate of interest on their home loan for a maximum of one year (or for a pre-determined period chosen by the financial institution).
The MCLR rate ensures better transparency across the system, as lenders are liable to publish it for different tenors. It benefits prospective customers as it reflects the changes in the benchmark rates instead of one standard base rate and spread.
As Marginal Cost of fund based Lending Rate implements a similar method followed by all financial institutions, it allows customers to enjoy the benefits of repo rate cuts introduced by the Reserve Bank of India whenever a revision is made.
Furthermore, MCLR rate changes according to the loan tenor availed by a particular borrower; fixed home loan interest rate is not affected by MCLR.
Additional Read: Understand What Is MCLR Means In Housing Loan
