Differences between lending rates: RLLR, MCLR, PLR?

Differences between lending rates: RLLR, MCLR, PLR?

Lending rates are fundamental elements of the financial sector, wielding significant influence over borrowing expenses for people. These rates shape economic decisions and investment strategies, reflecting the interconnectedness of global economies.

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.

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.

Understanding MCLR is essential in comprehending the dynamics of loans. MCLR signifies the minimum rate at which a bank is permitted to lend to its customers. This benchmark, determined based on the bank’s marginal cost of funds, incorporates factors such as deposit rates, borrowing costs, and operating expenses.

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, the loan interest rate comprises MCLR plus a spread or margin, which is determined by 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: MCLR is computed 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.

The PLR rate is established by the bank’s management, taking into account several factors such as operational costs, minimum margin requirements, and funding expenses.

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 spread, an integral part of the PLR, covers additional costs above the Repo Rate and is influenced by market conditions and credit risk assessments. These factors collectively shape the final interest rate offered to customers, impacting borrowing costs and the overall lending market dynamics.

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:

When the PLR rises, it results in higher interest rates for borrowers. This, in turn, leads to elevated loan repayments, potentially straining borrowers’ finances and impacting affordability adversely. Borrowers may find it more challenging to meet their monthly obligations as a result of increased interest expenses.

Conversely, a decrease in the PLR leads to lower interest rates for borrowers. This offers relief in monthly loan obligations, making it more manageable for borrowers to repay their loans. Lower interest rates enhance affordability, freeing up funds for other expenses or savings.

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 interest rate for the loan will be determined based on the specific rate type (MCLR, PLR, or RLLR) and a certain spread or margin decided by the bank.

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

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.

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]

Q: What is the primary difference between RLLR, MCLR, and PLR?

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.

Q: How do these lending rates affect borrowers?

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.

Q: Which lending rate system offers the most transparency?

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.

Q: Which lending rate system offers the most stability for borrowers?

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.

Q: Can borrowers switch between these lending rate systems?

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.