Highlight: Learn what MCLR is and how it can affect different types of loans. Find out how MCLR affects your best personal loans when interest rates change.
The MCLR or Marginal Cost of Funds Lending Ratio system owes its input to the RBI or Reserve Bank of India. The new MCLR interest rate system introduced in April 2022 is a modified version of the old base rate system. The new interest rate is calculated using the bank’s repo rate and customer deposit rate. Following the introduction of new regulations, commercial banks are now required to set new benchmarks for domestic lending rates based on the marginal cost of funding.
You need MCLR
In the old base rate system for banks, when the repo rate changed, banks were reluctant to adjust their interest rates to reflect the changes. Therefore, although the RBI changes interest rates regularly, banks have not been willing enough to change their lending or deposit rates.
With the introduction of MCLR, banks have to adjust their interest rates depending on the risk factor for different customer segments. There are different reference interest rates for different loan terms. First, banks set interest rates for a period of 1 day or a month up to 1 year. On a bank basis, they can also charge interest for more than a year.
What do you mean by MCLR?
The marginal cost of borrowing is the minimum borrowing rate below which a bank cannot borrow or lend. “Marginal” as used herein means additional or change or margin in an economic sense. Therefore, the MCLR is based on any change in banks’ marginal cost terms.
The MCLR is reviewed monthly against repo rates and other lending rates. Banks generally cannot lend below the MCLR, except in a few rare cases.
Banks can lend under MCLR under the following conditions:
- For loans against deposit
- Loans for bank employees of a specific bank
Type of loan associated with MCLR
- Under the latest RBI guidelines, all adjustable rate 대출119 approved after are subject to the MCLR, including loan extensions. Existing adjustable rate borrowers may also switch to MCLR depending on the options offered. These adjustable rate loans include mortgage loans, business term loans and real estate loans.
- MCLR is tied to banks, so the adjustable rate loans they apply for are tied to MCLR. Some banks combine educational and vehicle loans with MCLR. So whoever has the variable interest rate of the best car or personal loan is also tied to the MCLR.
Does MCLR affect personal loans?
Personal loans are a good option for short-term liquidity. It is important to note that MCLR does not affect your best flat rate personal loans. The variable rate of the best personal loans will be cheaper in the long run with a low EMI.
Components of MCLR Ratios
The MCLR Index consists of several components. Them:
- Marginal cost of operations including return on equity and marginal cost of loan
- Bank operating costs
- Negative carry over due to cash repo rate. All banks have to bear the cost of maintaining their reserves with RBI, which is a rollover.
- Term or risk premiums for long-term loans from banks.
According to RBI’s new guidelines, banks calculate marginal costs based on the following factors:
- Interest on savings, giro, term and foreign currency deposits.
- Loans including short and long term interest rates and repo rate
- Net worth return