You must be reading the budget to know the ups and downs occurring in interest rates. The RBI in accordance with other banks, changes lending rates based on several economic factors. There’s a lot that goes into fixing the interest rates and even for adopting the method of deciding these rates. In 2010, the base rate was the key method that determined the minimum threshold of the lending rate. However, in 2016,

MCLR was introduced to determine the same.

What is the MCLR rate?

The marginal cost of funds-based lending rate is an adjustment of rates based on the cost of funds, which is referred to as marginal cost. If you are wondering what are these marginal costs exactly then below are some of the components to explain the same.
  • The marginal cost of borrowings along with the return on net worth
  • Cost banks sustain to keep the reserves with RBI
  • Operating costs sustained by banks
  • Highest interest that's charged for long term loans

What kind of loans are sanctioned with MCLR?

All the loans that used the floating rate system to calculate interest rates use the MCLR system. Here are loans that are being sanctioned in the MCLR way
  • Home loans
  • Loans against property
  • Corporate term loan
If you want to understand the basics of MCLR rate, then you must be acquainted with these two following terms.

Reset Clause –

Reset clause states that the lending rates for your loans will be revised periodically. The rates won't be revised as and when the changes occur but only after the prescribed period. There are reset dates allotted to your loan and is usually set at one year or lesser. For example, you borrow a loan on January 1st; your lending rate will be the one prevailing on that day. Considering that your reset period is one year, the lending rate will not be revised till the January 1st of the following year, irrespective of all revisions that occur in the lending rate during this one year. The reset rate will be the one prevailing on the January 1st of the next year.

Spread –

Loans linked to MCLR determine the interest rate basis the spread. Spread is an additional interest percentage that you have to pay over and above the minimum limit set by the RBI. Banks can spread their lending rates over 25 basis points. It is totally up to banks to determine the spread.

Effective from 2016, RBI has started following the MCLR system for loans and not the base rate system.

Learn more about your Home Loan Eligibility here.


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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