MCLR | Base Rate | PLR

MCLR is a lending rate calculated based on cost of raising new funds for the bank which include the cost of maintaining CRR/SLR, operating costs of banks and tenor premium. As MCLR is closely linked to repo rate, it improves the transmission of RBI’s repo rate cut to the end borrower. Banks publish MCLR for at least five durations which are overnight MCLR, 1 month MCLR, 3 month MCLR, 6 month MCLR and 1 year MCLR. However banks may publish MCLR base rates for more than five periods.In general, lenders revise the MCLR rate every month. Interest rate on each floating rate loan is reset based on the duration of the MCLR to which it is linked.

Base Rate is the lending rate calculated based on the total cost of funds of the banks and is the minimum interest rate at which a bank can lend except for loans to its own employees, its retired employees and against bank’s own deposits. All floating and fixed rate loans sanctioned by banks before 1st April, 2016 were priced using base rate as benchmark. If you check the MCLR and base rate of banks shown above, you will notice that MCLR rates are mostly 5 - 50 bps lower compared to base rate. The reason is that MCLR is based on the cost of raising new funds and hence, any changes in repo rates results in changes in cost of borrowings of banks which gets transmitted to MCLR. Starting from April 2018, RBI has mandated that banks’ base rates be linked to MCLR rates. This is expected to benefit home loans and loans against property borrowers whose loans are linked to base rate. Any increase or decrease in MCLR rates will now automatically be applicable to pre 2016 loans that are benchmarked to base rate.

PLR stands for Prime Lending Rate. It is the internal benchmark rate used for setting up the interest rate on floating rate loans sanctioned by Non Banking Financial Companies (NBFC) and Housing Finance Companies (HFC). PLR rate is calculated based on average cost of funds.NBFC and HFC generally price their loan at discount on their existing PLR.

Floating rate loans are linked to MCLR rate with effect from April 1st, 2016. Typically, home loans and loans against property schemes are floating rate loans and benchmarked to MCLR rates. Some banks offer fixed rate home loan and property loan under special schemes. Personal loan, business loan, car loan and gold loan are mostly fixed rate loans and are independent of MCLR rates.

Floating rate on your home loan is a function of two parameters; the reset frequency of the interest rate on your loan and spread on the benchmark. These two parameters together will determine the interest rate you will pay on your home loan, mortgage loan or business loan throughout the loan tenure:

• Reset Frequency: The applicable MCLR rate will be the rate corresponding to the interest rate reset frequency of the loan. So, a home loan with a reset frequency of every one year will be priced with the 1 year MCLR as the benchmark and a home loan with a 3 month reset will be priced with the 3 month MCLR as the benchmark

• Spread: The next component is spread or the margin that you pay over the bank‘s MCLR for a particular loan type of the bank. The margin would be fixed at time of sanction and can be changed only if there is a significant change in customers’ credit profile. For instance, Bank A has 1 year MCLR of 9.1% and spread of 0.2% for home loan. The interest rate that you will be charged in this case would be 9.3%.

• When a bank changes its MCLR, interest rate on your floating rate home loan will change accordingly. Banks typically adjust the change in floating rates, by changing the loan tenure and by keeping the EMI constant.
• For instance, if you have taken home loan rate at floating rate of 9% and after a year, your bank decides to lower down the MCLR by 50 bps. Hence, your home loan floating rate associated with MCLR rate will also come down to 50 bps at a rate of 8.50%. In most of the cases, the cut in home loan rate might not result in lower EMI, but your loan tenure will stand reduced.

The difference between MCLR and Base rate is majorly due to factors on which these are calculated. Base rate of a bank is calculated based on the following factors -

• Average cost of funds
• Operating expenses
• Minimum rate of return i.e. profit
• Negative carry (loss in interest income) of keeping CRR/SLR

MCLR is calculated on the following factors-

• Marginal or incremental cost of funds which includes cost of raising new borrowings/deposits and minimum rate of return(profit)
• Negative carry on account of CRR
• Operating costs
• Calculated tenor wise based on cost of raising new funds for different tenors

The above comparison shows that MCLR rate is more transparent and customer friendly as compared to base rate:

• MCLR is calculated based on the cost of raising new funds and also allows to have differential rates based on the underlying tenure of new funds.
• Cost of raising new funds for banks is closely linked to Repo Rate which makes MCLR rate more responsive to any changes in policy repo rates as compared to base rates.
• Further, MCLR of banks is revised every month as compared to base rate which is revised every quarter which makes MCLR more dynamic as compared to base rate.

08th Oct 2021 – RBI keeps Repo Rate unchanged at 4.00%

In its fourth bi-monthly monetary policy for the financial year 2021-22, RBI has kept the repo rate unchanged to 4.00%. This has been done to limit the damage to the economy caused by the second wave of Covid-19. Repo rate is the rate at which the central bank infuses liquidity in the banking system. The reverse repo rate also stands unchanged at 3.35%.

✅What is the meaning of MCLR?

MCLR is the abbreviated term for Marginal Cost of Fund based Lending. MCLR is a benchmark rate used by banks to lend loans. The rate is determined based on factors such as CRR/SLR, operating costs of banks, and repo rate and is an important factor of loan interest rates.

✅Is the MCLR rate the same for all banks?

No, the MCLR rate is not the same for all banks. Indeed, each bank has a different MCLR that varies along with tenors such as Overnight MCLR, 1-month MCLR, 3-month MCLR, 6-month MCLR and 1-year MCLR.

✅What is the difference between the base rate and MCLR?

The difference between MCLR and the base rate is precisely due to the factors considered in determining the two. While MCLR is based on factors like incremental cost, which includes the cost of raising new borrowings/deposits and the minimum rate of return(profit), negative carry on account of CRR and operating costs. The base rate is based on factors such as average costs of funds, operating expenses, profit returns, and negative carryforwards, such as loss in interest income. Also, while the base rate remains the same for all tenures, MCLR varies as per the loan tenure.

✅What is the SBI MCLR Rate?

State Bank of India revised the MCLR rate each month for all tenures. Currently, SBI MCLR rate for one year tenure is 7.00%. The SBI MCLR rate for other tenures ranges between 6.65% to 7.00%.

✅What is the current Mclr rate of ICICI?

Currently, ICICI Bank MCLR rate ranges between 7.00% to 7.25% for overnight, one month, three months, six months and one year.