MCLR the new benchmark for lending rate has replaced the base rate and this will act as the point below which banks are not allowed to give loans.
Read on to know more about MCLR in detail
What is MCLR?
MCLR stands for Marginal cost of funds based lending rate and this is the standard lending rate below which a bank is not allowed to give loans (exceptions are made for priority sectors). The lending rate will be different from bank to bank and depends on 4 major factors i.e.
- Marginal cost of funds: This is the marginal cost of borrowing and return on net worth of banks.
- Operating Costs: Operating costs is the cost incurred by the bank to perform day to day operations
- Tenure of premium: An additional slab of interest over the base rate, based on the loan tenure.
- Negative carry on account CRR(Cash Reserve Ration)
How Does MCLR Work?
The floating home loans that you will be taking will be linked to MCLR now. Almost all banks have announced a 5 to 7% rate for MCLR. Home loans will fall under either the 6 month MCLR or the one year as the benchmark. Banks can also decide on the tenure they want to use for resetting the rates of long term loans such as home loans. Banks like SBI and ICICI have set one year MCLR as the benchmark for home loans. Even though the benchmark is set and reset for every year, the MCLR is reviewed every month depending on the agreement with the bank. The reset is primarily included to smoothen the impact of changing rates in banks. Loans such as retail loans are will have MCLR tenors anywhere between six months and one year and corporate loans will have shorter tenors. Existing loans will not fall under the MCLR and the borrower will follow the base rate till repayment or renewal of the loan. In this case, the banks will continue publishing rates. Existing borrowers can move to MCLR loans with mutually acceptable terms with the bank.
- The base rate system has been replaced with MCLR which will act as the guideline for commercial banks to set lending rates.
- The floating rate loans are completely linked to MCLR.
- MCLR is tenure based and not a single number. A minimum of 5 MCLR rates have to be published across overnight, one month, three month, six month and one year tenure
- Existing borrowers can continue repaying with either the base rate or switch to MCLR. If the switch to MCLR is done, they can’t switch back
MCLR rates will help in improving transparency when determining interest rates, ensure availability of bank credit at great interest rates and will also enable banks to become more competitive in the long run.