The full form of MCLR in banking is Marginal Cost of Funds-Based Lending Rate. It is the minimum interest rate below which banks are not allowed to lend, except for some special cases. Introduced by the Reserve Bank of India (RBI) in April 2016, MCLR replaced the earlier base rate system to ensure better transparency and faster transmission of monetary policy rates to borrowers.
What Is MCLR in Banking?
MCLR is the internal lending benchmark rate of banks. It reflects the actual cost incurred by banks in raising funds and helps decide the interest rate on various loans such as home loans, personal loans, and business loans.
Each bank publishes multiple MCLR rates—for overnight, one-month, three-month, six-month, and one-year tenures—depending on the type of loan.
MCLR ensures that changes in RBI’s repo rate quickly impact loan interest rates, offering fair pricing to customers.
How Is MCLR Calculated?
Banks determine MCLR based on the following factors:
1. Marginal Cost of Funds
This includes the interest paid on deposits and borrowings. It is the most important component affecting MCLR.
2. Operating Costs
Banks incur costs for maintaining accounts, branches, technology, and staff. These expenses are included in the MCLR calculation.
3. Cash Reserve Ratio (CRR) Cost
Banks maintain a portion of their deposits with RBI as CRR, for which they earn no interest. The cost of this requirement affects MCLR.
4. Tenor Premium
Longer-tenure loans carry higher risks. Banks add a premium for longer loan durations, influencing the MCLR.
Why Is MCLR Important?
1. Ensures Transparency
MCLR makes loan interest rate calculations more transparent and predictable for customers.
2. Quick Transmission of Policy Rates
Any change in the RBI repo rate affects MCLR, leading to faster adjustments in loan interest rates.
3. Fair Pricing for Borrowers
Since MCLR reflects real funding costs, borrowers get more accurate and fair loan pricing.
4. Helps in Choosing Loan Types
Customers can choose between floating and fixed-rate loans after comparing various MCLR tenures.
Conclusion
MCLR, or Marginal Cost of Funds-Based Lending Rate, plays a crucial role in India’s banking system. It ensures transparent lending, fair rates, and faster response to monetary policy changes.