In the dynamic landscape of banking and finance, interest rates play a pivotal role in shaping the borrowing and lending behaviors of individuals and businesses alike. One such critical benchmark in India is the Marginal Cost of Funds-Based Lending Rate (MCLR).
This guide explores deep into the intricacies of MCLR, its inception, objectives, impact on the economy, and its implications for various types of loans.
All Banks Current MCLR Rates 2025
| Bank | Up to Rs. 30 Lakh | Above Rs. 30 Lakh to Rs. 75 Lakh | Above Rs. 75 Lakh |
|---|---|---|---|
| SBI Bank | 8.00% p.a. onwards | 8.00% p.a. onwards | 8.00% p.a. onwards |
| HDFC Bank | 8.75% p.a. onwards | 8.75% p.a. onwards | 8.75% p.a. onwards |
| LIC Bank | 8.50% – 10.35% p.a. | 8.50% – 10.55% p.a. | 8.50% – 10.75% p.a. |
| ICICI Bank | 8.75% p.a. onwards | 8.75% p.a. onwards | 8.75% p.a. onwards |
| Kotak Mahindra Bank | 8.75% p.a. onwards | 8.75% p.a. onwards | 8.75% p.a. onwards |
| Punjab National Bank | 8.50% – 11.05% p.a. | 8.50% – 11.05% p.a. | 8.50% – 11.05% p.a. |
| Bank Of Baroda | 8.40% onwards | 8.40% – 10.65% p.a. | 8.40% – 10.90% p.a. |
| Bajaj Housing Finance | 8.50% p.a. onwards | 8.50% p.a. onwards | 8.50% p.a. onwards |
| Axis Bank | 8.75%-10.30% p.a. | 8.75%-10.30% p.a. | 8.75%-10.30% p.a. |
| Bank of India | 8.40% p.a onwards | 8.40% p.a onwards | 8.40% p.a onwards |
| TATA Capital | 8.75% p.a. onwards | 8.75% p.a. onwards | 8.75% p.a. onwards |
What Are MCLR Rates?
MCLR (Marginal Cost of Funds based Lending Rate) is a benchmark interest rate that banks use to determine the rates on various loans, including home loans, personal loans, and business financing.
Introduced by the Reserve Bank of India (RBI) in April 2016, MCLR replaced the earlier Base Rate system to enhance transparency and ensure that loan rates align more closely with the banks’ current cost of funds.
Objectives of MCLR
- Enhance RBI Policy Rate Transmission to Banks
- Increase Transparency in Loan Interest Rate Setting
- Ensure Fair Interest Rates for Banks and Borrowers
- Boost Bank Competitiveness and Support Economic Growth
MCLR Rates: RBI Guidelines
- Lending rates adjusted at least once a year based on MCLR.
- Fixed home loan rates remain unaffected by MCLR changes.
- Cost of funds calculation includes deposit balances and additional borrowing.
- Banks can add spreads and credit risk premiums over MCLR, which stay constant unless the borrower’s credit profile changes significantly.
- Exempted loans include loans against deposits, loans to bank employees, and loans linked to external market benchmarks.
- Existing base rate borrowers can switch to MCLR-based pricing, with banks potentially charging a reasonable fee based on actual costs.
How is MCLR Rate Calculated?
The Marginal Cost of Funds Based Lending Rate (MCLR) is determined using the following formula:
MCLR = MCOF + Negative Carry on CRR + Operating Costs + Tenor Premium
Breakdown of the Components
| Components | Description |
|---|---|
| MCOF (Marginal Cost of Funds) | Cost for banks to obtain funds from sources like deposits. Driven by the interest rates of these funding sources. |
| Negative Carry on CRR (Cash Reserve Ratio) | Cost of holding funds with RBI without earning interest. Based on a set rate and fund acquisition costs. |
| Operating Costs | Daily expenses of running a bank. Includes salaries, rent, utilities, and administration. |
| Tenor Premium | Extra charge for longer-term loans. Accounts for increased risk over extended loan periods. |
Bank Deadlines for Disclosing Monthly MCLR
Banks can offer loans with either fixed or floating interest rates and must disclose their MCLR or internal benchmark based on different maturities, such as one month, overnight, three months, one year, or other durations chosen by the bank.
Lending rates cannot be set below the MCLR for any loan tenure. However, certain loans are exempt from MCLR linkage, including:
- Loans against customer deposits
- Loans to bank employees
- Government special loan schemes (e.g., Jan Dhan Yojana)
- Fixed-rate loans with tenures exceeding three years
Impact of MCLR on the Indian Economy
| Impact | Description |
|---|---|
| Enhances Transparency and Trust | Provides a clear method for setting loan interest rates. Increases borrower confidence in the banking system. Encourages more individuals and businesses to seek credit from banks. |
| Improves Monetary Policy Transmission | Ensures RBI rate changes are quickly reflected in bank loan rates. Makes monetary policy measures more effective in controlling inflation and stimulating growth. |
| Reduces Borrowing Costs | RBI interest rate cuts lead to lower Equated Monthly Installments (EMIs) for borrowers. Increases disposable income for consumers and reduces expenses for businesses. |
| Stimulates Economic Growth | Lower borrowing costs boost consumer spending and business investments. Drives overall economic activity and expansion. |
| Strengthens the Banking Sector | Aligns loan rates with banks’ actual cost of funds. Enhances the competitiveness and stability of financial institutions. |
MCLR Rates in Home Loans
- Floating Interest Rates:
- MCLR-based home loans come with floating interest rates, meaning the rate can fluctuate based on changes in the MCLR.
- This ensures that borrowers benefit from any reductions in the MCLR, potentially lowering their interest burden over time.
- Link to REPO Rate and Cost of Funds:
- The MCLR is closely tied to the REPO rate (the rate at which the central bank lends to commercial banks) and the bank’s internal cost of funds.
- When the REPO rate changes, banks adjust their MCLR accordingly, which in turn affects the interest rates on home loans.
- Regular Revisions:
- Unlike fixed-rate loans, the MCLR is subject to revision after every reset period, which can be up to one year.
- Some banks may revise the MCLR more frequently, even on a daily basis, ensuring that the loan rates remain aligned with current economic conditions.
- Dependence on Borrower’s Risk Profile:
- The MCLR offered on a home loan can vary based on the borrower’s creditworthiness.
- Factors such as CIBIL score, property value, and loan tenure play a significant role in determining the final MCLR rate applied to a home loan.
MCLR Rate vs Base Rate vs Repo Rate vs RLLR vs ELBR
| Parameter | MCLR (Marginal Cost of Funds Based Lending Rate) | Base Rate | Repo Rate (Repurchase Option Rate) | RLLR (Retail Lending Linked Rate) | EBLR (External Benchmark Lending Rate) |
|---|---|---|---|---|---|
| Definition | Minimum lending rate below which banks cannot lend | Minimum rate below which banks cannot lend | Rate at which RBI lends money to commercial banks | Rate linked to external benchmarks for retail loans | Rate linked to external benchmarks for lending |
| Purpose | Enhance transmission of monetary policy and ensure transparent lending rates | Ensure transparency and fairness in lending | Control inflation and regulate liquidity in the economy | Align loan rates with external benchmarks | Align loan rates with external benchmarks |
| Impact on Loans | Directly affects interest rates on various loans | Sets the floor for lending rates | Indirectly influences consumer interest rates by affecting banks’ cost of funds | Determines interest rates based on external benchmarks | Determines interest rates based on external benchmarks |
| Set By | Individual commercial banks based on RBI guidelines | Individual commercial banks | Reserve Bank of India (RBI) | Individual commercial banks | Individual commercial banks |
| Frequency of Change | Monthly | Quarterly or Semi-Annually | Bi-Monthly (during RBI meetings) | Depends on the benchmark used | Depends on the benchmark used |
| Responsiveness to RBI Policy | Highly responsive due to inclusion of repo rate and marginal cost | Less responsive compared to MCLR | Direct tool of RBI’s monetary policy | Varies, generally linked to MCLR or Repo Rate | Varies, generally linked to MCLR or Repo Rate |
| Transparency Level | High | Medium | Medium | High | High |
| Economic Focus | Improve internal efficiency and transparency in loan pricing | Improve transparency over previous systems | Regulate overall liquidity and economic stability | Align with external market conditions | Align with external market conditions |
| Volatility | Low to Moderate | Low | Low to Moderate | Depends on the linked benchmark | Depends on the linked benchmark |
Conclusion
Understanding MCLR rates is essential for making informed decisions about your home loans and other borrowing needs. MCLR offers a transparent and responsive framework that aligns loan interest rates with current market conditions, ensuring that borrowers benefit from changes in the Reserve Bank of India’s policies.
Ready to take control of your financial future? Contact Credit Dharma today to explore the best home loan options tailored to your needs and take advantage of competitive MCLR rates.
Frequently Asked Questions
MCLR stands for Marginal Cost of Funds Based Lending Rate, a benchmark interest rate used by banks to determine loan rates.
Banks recalculate the MCLR monthly, making it more responsive to RBI policy changes, while they update the Base Rate less frequently, making it less sensitive to market fluctuations.
Yes, MCLR rates are floating and can increase or decrease based on changes in the Reserve Bank of India’s policy rates and the bank’s cost of funds.
Banks commonly link home loans, personal loans, and auto loans to MCLR, allowing interest rates to adjust with market changes.
Banks can reset the MCLR as often as monthly, ensuring that loan rates remain aligned with current economic conditions.
No, fixed-rate loans have a constant interest rate that does not change with MCLR fluctuations.
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