Recently, the Marginal Cost of Funds-Based Lending Rate has gained prominence in the banking sector, especially when it comes to borrowing Home Loans. As an internal benchmark rate, MCLR determines the minimum rate at which you can avail yourself of a Loan. Let us explore the concept, its factors, and its effect on Home Loan equated monthly instalments.
You get multiple results when you want to know what is MCLR while researching online. MCLR, introduced in April 2016, replaced the earlier base rate system for calculting Loan interest rates. The interest rate is tied to the lender’s marginal cost of funds, including Savings Account rates, Term Deposit rates, short-term interest rates, and return on net worth.
With this internal benchmark, lenders extend Loans based on MCLR rates, providing transparency in dynamic lending practices.
Factors affecting MCLR
After gaining knowledge about the MCLR meaning, note that all floating-rate interest Loans sanctioned after April 1, 2016, are linked to MCLR rates. These include Home Loans, Loans Against Property, and Corporate Term Loans. Here are factors affecting it:
Marginal cost of funds
It considers various interest rates and returns lenders incur while acquiring funds.
No return on Cash Reserve Ratio
Banks do not earn interest on the reserves maintained with the RBI.
Operating costs
These encompass the expenses incurred by lenders in their operations.
Tenure premium
It signifies that higher interest charges on long-term Loans affect MCLR rates.
Cost of borrowing
Lenders consider the cost of borrowing funds from other sources, such as interbank and market borrowings, influencing their overall cost of funds.
Repo rate changes
Lenders also incorporate changes in the repo rate set by the RBI. It impacts the cost of borrowing money from them, affecting their overall cost of funds and, consequently, the MCLR. Changes in the MCLR can affect your Home or Personal Loan EMI. However, your credit score and Loan duration also influence the interest rate you receive.
Points to note
After understanding what is MCLR, switching to the system is a simple process, but it requires careful consideration. As MCLR rates fluctuate with repo rate revisions, borrowers must weigh the potential benefits against any additional charges involved. The RBI looks at various factors every month or quarter, such as the cost of borrowing money, the lenders’ expenses, and changes in the economy and decides if the MCLR needs to be changed or updated.
The MCLR has brought transparency and flexibility to lending practices, impacting Home Loan EMIs. Understanding MCLR’s intricacies empowers borrowers to make informed decisions, ensuring they are well-prepared for any interest rate fluctuations and aligning their Home Loan choices with their financial goals.
Conclusion
By improving transparency, fairness, efficiency, and risk management, MCLR not only helps borrowers and lenders but also offers an opportunity to consider personalised Loans and other financial needs that have contributed to this evolving situation.