Understanding the differences between various lending rate benchmarks, such as RLLR, MCLR, and PLR, is essential for navigating the borrowing ecosystem effectively.
In this article, we will analyze the concepts of RLLR, MCLR, and PLR, which will assist you in making informed decisions throughout your home loan journey.
MCLR vs RLLR vs PLR: Lending Rate Differences
India has several benchmark lending rates used by banks to determine loan interest rates. Here’s a comprehensive comparison of MCLR, RLLR, and PLR:
Key Lending Rates Overview
Marginal Cost of Funds Based Lending Rate (MCLR)
- Introduced by RBI in April 2016 to improve lending rate transparency
- Minimum interest rate a bank can charge on loans
- Calculated based on:
- Marginal cost of funds
- Operating expenses
- Statutory costs
- Typically revised monthly
- More dynamic compared to traditional rates
- Current MCLR for overnight loans ranges from 7.30% to 8.40%
Repo Linked Lending Rate (RLLR)
- Directly linked to the Reserve Bank of India’s repo rate
- Ensures lending rates fluctuate with RBI’s policy rates
- Components include:
- Repo rate
- Risk premium
- Operating expenses
- More transparent and responsive to policy changes
- Allows faster transmission of rate changes to borrowers
Prime Lending Rate (PLR/RPLR)
- Also known as Retail Prime Lending Rate
- Benchmark rate based on bank’s average cost of funds
- Includes:
- Historical deposit costs
- CRR and SLR maintenance costs
- Operating expenses
- Less flexible and slower to respond to market changes
- Serves as a base rate for calculating loan interest
Comparative Analysis
| Aspect | MCLR | RLLR | PLR/RPLR |
|---|---|---|---|
| Calculation Basis | Marginal cost of funds | Directly linked to repo rate | Average cost of funds |
| Rate Revision Frequency | Monthly | Directly linked to the repo rate | Less frequent |
| Transparency | Moderate | High | Low |
| Rate Responsiveness | Moderate | High | Low |
Key Differences
- MCLR is more dynamic than PLR
- RLLR provides the most transparent and quick rate of transmission
- PLR is the least responsive to market changes
The evolution of these rates reflects RBI’s ongoing efforts to create a more transparent and efficient lending ecosystem in India.
What is MCLR?
The marginal cost of funds-based lending rate (MCLR) is a benchmark lending rate introduced by the RBI in April 2016. It replaced the “Base Rate” system and became the primary benchmark for new loans in India.
How to calculate MCLR & how does it affect loans?
MCLR serves as the benchmark for banks to establish interest rates on different types of loans, such as home loans.
Generally, lenders determine the loan interest rate by combining the MCLR with a spread or margin, which depends on factors like the borrower’s credit risk.
Given that MCLR rates change periodically, usually on a monthly or quarterly basis, this prompts corresponding adjustments in the interest rates of loans linked to MCLR.
Lower MCLR rates have the potential to decrease loan interest rates, thereby potentially reducing the EMIs for borrowers.
Conversely, higher MCLR rates may lead to increased loan interest rates, resulting in higher EMI payments for borrowers.
Calculation of MCLR:
Lenders compute the MCLR by considering multiple factors, such as the cost of funds, operational expenses, and desired margin. The formula incorporates these elements:
MCLR = Marginal Cost of Funds (Weighted Average Cost of Current and Savings Account Deposits + Borrowings + Term Deposits) + Operational Costs + Tenor Premium
What is RLLR?
RLLR, often abbreviated as “Rate Lock, Loan Ready,” pertains to mortgage lending, indicating that the borrower’s mortgage application has advanced to a stage where the interest rate is secured and the loan is prepared for approval and funding.
How to calculate RLLR & how does it affect loans?
The Repo Rate Linked Lending Rate (RLLR) exerts a profound influence on loan interest rates, especially in sectors like home loans.
Unlike the MCLR, RLLR maintains a direct correlation with the RBI’s monetary policy.
When the RBI adjusts its repo rate, fluctuations in RLLR swiftly follow suit, directly impacting the interest rates on loans.
This transparency and predictability inherent in RLLR empower borrowers with a clear understanding of how interest rates are determined, facilitating informed decisions in loan agreements.
Understanding the calculation process and the implications of RLLR is crucial for individuals in their loan agreements.
Calculation of RLLR:
RLLR = Repo Rate + Spread
Repo Rate: The rate at which banks borrow funds from the Reserve Bank of India (RBI).
Spread: The additional percentage incorporated by the lending institution to account for operational expenses and profit margins.
What is PLR?
PLR typically stands for “Prime Lending Rate,” representing the interest rate charged by commercial banks to their most creditworthy clients, often large corporations. It serves as a benchmark for determining rates on various loans and financial products.
How to calculate PLR & how does it affect loans?
PLR is subject to factors shaped by RBI directives and internal bank policies. Lending institutions must adhere to RBI regulations, setting their PLR rate not below the RBI’s “base rate” unless explicitly permitted by the RBI.
Calculating interest rate
Interest Rate = (Spread + Prime Lending Rate)
RBI regulations and internal bank policies influence India’s Prime Lending Rate (PLR). Compliance with RBI directives ensures stability and consistency in the lending market.
The PLR rate is determined by considering operational costs, margin requirements, and funding expenses.
The relationship between PLR and loan interest rates
The relationship between the PLR and loan interest rates is direct and substantial, exerting influence on both borrowers and lenders alike. Changes in the PLR rate have a direct impact on the interest rates charged on loans.
A real-life example of how banks use MCLR, PLR, and RLLR
Let’s assume a bank offers loans with the following rates:
- MCLR (Marginal Cost of Funds Based Lending Rate): 8%
- PLR (Prime Lending Rate): 10%
- RLLR (Repo Linked Lending Rate): 7.5%
Now, let’s consider a borrower who wants to take out a loan of Rs. 1,00,000 from the bank. The bank will determine the interest rate for the loan based on the specific rate type (MCLR, PLR, or RLLR) and a certain spread or margin.
MCLR: If the bank uses MCLR, the borrower’s interest rate will be MCLR plus a spread. Let’s say the spread is 0.5%.
So, the interest rate for the borrower would be 8% (MCLR) + 0.5% (spread) = 8.5%. Therefore, the borrower would pay an interest of Rs. 8,500 per year.
PLR: If the bank uses PLR, the borrower’s interest rate will be PLR plus a spread. Let’s say the spread is 1%.
So, the interest rate for the borrower would be 10% (PLR) + 1% (spread) = 11%. Therefore, the borrower would pay an interest of Rs. 11,000 per year.
RLLR: If the bank uses RLLR, the borrower’s interest rate will be linked to the prevailing repo rate set by the central bank (such as the Reserve Bank of India) plus a spread. Let’s say the repo rate is 5% and the spread is 2.5%.
So, the interest rate for the borrower would be 5% (repo rate) + 2.5% (spread) = 7.5%. Therefore, the borrower would pay an interest of Rs. 7,500 per year.
In banking scenarios, the calculation might involve additional factors such as reset periods, conversion clauses, etc. So, borrowers must understand the terms and conditions associated with each type of lending rate to make informed decisions regarding their home loans.
Key differences between RLLR, MCLR, and PLR
When analyzing lending rates, it’s essential to understand the distinctions between the Marginal Cost of Funds-based Lending Rate (MCLR), Repo Linked Lending Rate (RLLR), and Prime Lending Rate (PLR).
Each of these mechanisms reflects unique approaches to setting interest rates and their linkage to broader economic indicators.
| Aspect | RLLR | MCLR | PLR |
|---|---|---|---|
| Calculation | Rate based on prevailing market conditions and borrower’s credit profile. | Calculated based on the bank’s marginal cost of funds, operating expenses, and tenor premium. | Determined by the bank’s board of directors based on economic factors. |
| Transparency | Varies by lender, but generally transparent once locked. | Transparent, as it’s based on a formula disclosed by the bank. | Typically transparent, as it’s set by the bank and widely publicized. |
| Influence on Borrowing Costs | Impactful when locked as it determines the interest rate for the loan. | Directly affects the interest rate on loans linked to MCLR. | Used as a benchmark for various loan products, affecting borrowing costs. |
| Flexibility | Varies based on market conditions and lender policies. | Can be adjusted periodically based on changes in the bank’s funding costs. | Adjusted at the discretion of the bank’s board of directors. |
| Market Dynamics | Reflects prevailing market conditions and borrower’s creditworthiness. | Reflects changes in the bank’s cost of funds and monetary policy changes. | Reflects the bank’s perception of prevailing economic conditions. |
| Applicability | Commonly used in mortgage lending. | Predominantly used for floating rate loans across various loan products. | Used as a benchmark for various loan products, including corporate loans. |
| Regulatory Oversight | Subject to regulatory guidelines, but flexibility in implementation. | Governed by Reserve Bank of India (RBI) guidelines and regulations. | Subject to regulatory oversight and guidelines. |
Conclusion
Before obtaining a home loan, if you want to understand concepts like RLLR, MCLR, and PLR, and secure the best home loan possible, you can seek guidance from Credit Dharma.
Credit Dharma’s financial advisory services are equipped to assist you comprehensively with any queries or apprehensions you may have regarding securing the ideal home loan.
Through their personalized solutions, you can gain a deeper understanding of these concepts, enabling you to navigate your home loan journey with greater effectiveness.
Whether it’s clarifying doubts or strategizing your approach towards fulfilling homeownership dreams, their expertise can be invaluable.
Frequently Asked Questions [FAQs]
RLLR (Repo Linked Lending Rate) is directly linked to the repo rate set by the central bank, making it more responsive to changes in monetary policy.
The bank determines MCLR (Marginal Cost of Funds based Lending Rate) based on its cost of funds and other factors, while it used PLR (Prime Lending Rate), an older benchmark rate, before introducing MCLR and RLLR.
Borrowers with loans linked to RLLR experience more immediate changes in their interest rates in response to changes in the central bank’s policy rates.
MCLR-linked loans offer relatively stable rates but are revised periodically. PLR-based loans typically have higher rates and are less common nowadays.
RLLR is often considered the most transparent lending rate system because it directly reflects changes in the repo rate, which is set by the central bank and is publicly available information.
MCLR provides a certain level of stability for borrowers as it is revised periodically, usually monthly. However, the stability may vary depending on the bank’s policies and market conditions.
In many cases, borrowers can switch between different lending rate systems offered by their bank, subject to terms and conditions. However, there may be associated costs or fees, and borrowers should carefully evaluate the implications before making a switch.
The Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum interest rate below which banks cannot lend, determined internally by each bank based on factors like the marginal cost of funds and operating costs.
In contrast, the repo rate is the rate at which the Reserve Bank of India lends money to commercial banks, serving as an external benchmark influencing overall interest rates in the economy.
MCLR stands for Marginal Cost of Funds-Based Lending Rate. It is the minimum interest rate below which a bank cannot lend, except in certain cases allowed by the Reserve Bank of India (RBI).
MCLR is determined by factors like the marginal cost of funds, operational costs, and the bank’s Cash Reserve Ratio (CRR).
It replaced the base rate system to make interest rates more responsive to market conditions.
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