Picture this scenario, you visited a bank prior to April 2016, for a loan, what would you notice? You would notice that you are charged a rate of interest computed on the base rate. However, the system of base rate was not considered very transparent because it often created a delay in transferring timely the interest rate cut benefits to you as a customer.
However, the RBI (Reserve Bank of India) revised the credit policy and came up with a system called MCLR (marginal cost of funds-based lending rate). Post this, banks also adopted the MCLR policy. So, PNB started following PNB MCLR rate, Axis Bank started following Axis bank MCLR, and so on. So, what’s MCLR?
What’s MCLR?
MCLR is the minimum interest rate at which the financial institution can lend customers specific loans. MCLR refers to the internal benchmark lending interest rate used by banks to decide the rate of interest for distinct loans. The MCLR was introduced by the RBI in the year 2016 to ameliorate the changes in the policy rate to the lending rates provided to you as a customer by a financial institution.
As per the MCLR system, financial institutions are required for computing their lending interest rates depending on the marginal fund cost, which factors in the present borrowing cost, interest constituent paid on the deposits and distinct other parameters. This factor helps you make sure that the lending rates are responsive to the RBI-linked changes, resulting in higher efficiency and transparency in the system of banking.
Existing MCLR rates of the different financial institutions across tenures as of March 2023 are as follows –
| Name of the financial institution | Three years | Two years | One year | Six months | Three months | One month | Overnight |
| Axis MCLR rate | 8.95 per cent | 8.90 per cent | 8.80 per cent | 8.75 per cent | 8.70 per cent | 8.60 per cent | 8.60 per cent |
| State Bank of India MCLR rate | 8.70 per cent | 8.60 per cent | 8.50 per cent | 8.40 per cent | 8.10 per cent | 8.10 per cent | 7.95 per cent |
| HDFC Bank MCLR rate | 9.05 per cent | 8.95 per cent | 8.85 per cent | 8.70 per cent | 8.60 per cent | 8.55 per cent | 8.50 per cent |
| ICICI Bank MCLR rate | – | – | 9.20 per cent | 9.15 per cent | 9.10 per cent | 9.00 per cent | 9.00 per cent |
| PNB MCLR rate | 8.80 per cent | – | 8.50 per cent | 8.40 per cent | 8.20 per cent | 8.10 per cent | 8.00 per cent |
| Bank of Baroda MCLR rate | – | – | 8.55 per cent | 8.40 per cent | 8.30 per cent | 8.20 per cent | 7.20 per cent |
| IndusInd Bank MCLR rate | 8.95 per cent | 8.90 per cent | 8.60 per cent | 8.50 per cent | 8.35 per cent | 8.30 per cent | 8.25 per cent |
How is the MCLR computed?
There are distinct parameters that go into MCLR computation –
Operating expenditures –
Operating expenditures are incurred by financial institutions while extending the loan. This might involve the expense of stamp duty, raising funds, printing costs, legal expenses and more.
Negative carry-on cash reserve ratio –
The cash reserve ratio refers to a specified percentage of the overall deposits that financial institutions must ensure to keep in the form of reserves. This is the amount that cannot be extended in the form of a loan and thus, earns nearly zero returns. Owing to the nil returns, costs incurred in such funds surpass what you can earn on them.
Repayment tenure –
MCLR is computed by keeping in account the loan tenure, which is just the duration for a loan that can be availed. With the increase in tenure, the risk also increases. To cover the risk, financial institutions tend to levy a premium, which is even considered when deciding the MCLR.
What’s the impact of taking into account the MCLR?
The previously used system of base rate didn’t have adequate transparency and didn’t have the potential of responding instantly to the RBI’s policy changes. However, the MCLR introduction in the year 2016 established a uniform rate structure. Using this, you as a customer can seamlessly compare the interest rates offered by the distinct financial institutions.
Additionally, as per the MCLR regime, the financial institutions are permitted to price their credit independently, which endows them with high flexibility to change the rate of lending as per the Reserve Bank of India’s monetary policy. This can be performed promptly with policy adjustments and the delays can be avoided.
MCLR not only benefits the borrowers but even offers a competitive benefit to the lender, which allows to boost India’s economic growth.
What are the guidelines by the RBI on MCLR?
The RBI has listed the below-mentioned guidelines linked with MCLR –
- The period of reset for the MCLR must be at least once a year. This must be performed even if there’s no change in the MCLR (marginal cost of funds).
- Financial institutions are permitted to review as well as reset their MCLR once every month.
- New MCLR will come into effect from the 1st day of the following month.
- Financial institutions must mandatorily show the MCLR on their site and their branches.
- In the case a bank does not hold adequate data linked with MCLR, it must use the Reserve Bank of India’s benchmark deposit rate for a specific tenure to compute the MCLR.
- The MCLR does not impact the home loans that levy interest on the basis of a fixed rate. For home loans on a floating rate basis, MCLR when the loan is disbursed is taken until the time it’s reset.
What are the crucial deadlines to disclose monthly MCLR?
Financial institutions must ensure to display the MCLR on their site and even at their branches before the last day of working of every month. This is an important guideline issued by the Reserve Bank of India that should be complied with. In the case your financial institution does not disclose its MCLR, then it’s violating guidelines and rules set by the RBI. You can file a complaint against the financial institution with the proof and details of the violation.