MCLR

Full form: Marginal Cost of Funds based Lending Rate

Loans & Credit

MCLR is the minimum interest rate below which banks cannot lend. It replaced the Base Rate system in April 2016. Loans taken between 2016-2019 are typically MCLR-linked. Newer loans use RLLR (Repo-Linked Lending Rate) which passes RBI rate changes to borrowers faster.

In detail

MCLR is calculated by each bank based on marginal cost of funds, operating cost, tenor premium, and return on net worth. Your loan rate = MCLR + Spread. The spread is fixed at loan origination; only MCLR changes when the bank revises it.nnMCLR vs RLLR: RLLR (introduced 2019) is directly linked to RBI repo rate and resets quarterly. MCLR resets annually. If RBI has been cutting rates, you may be paying more on an MCLR loan than an RLLR loan -- consider switching.

Formula

MCLR = Marginal cost of funds + Negative carry on CRR + Operating cost + Tenor premium Your rate = MCLR (applicable tenor) + Spread EMI adjusts on each annual reset date based on new MCLR

Real-life example

🇮🇳 India example

Amit took a home loan in 2017 at 1-year MCLR (8%) + 0.25% spread = 8.25%. SBI MCLR has changed multiple times since. On each annual reset date his rate adjusts to current MCLR + 0.25%. He should compare with the RLLR rate his bank offers and consider switching if the differential justifies the Rs 5,000-10,000 switching fee.

Frequently asked questions

Should I convert my MCLR loan to RLLR? ▼

Compare your current MCLR-linked rate with the RLLR alternative your bank offers. Banks typically charge Rs 5,000-10,000 for the switch. The benefit depends on the rate differential and remaining tenure. RLLR passes RBI rate cuts faster -- generally worth switching if the rate saving covers the switching cost within 1-2 years.