How Home Loan MCLR Work?

A home loan is quite a huge deal, and it is bigger than any other loan you could take out. That is why you would have to know everything that comes along with this very loan. Moreover, you could not possibly get more out of it when you know the details. So, if there is a factor of benefit in this section, wouldn’t you want to know it? That is why we are going to talk about MCLR and how it works with home loans.

What is MCLR?

For banks – the Reserve Bank of India establishes a fixed internal reference rate. This interest rate is then utilized by banks and lending firms that are regulated by the Reserve Bank of India to establish the minimum interest rate applicable to various loan categories.

The Reserve Bank of India updates this rate on a frequent basis when there is a major change in India’s economic functions. Banks are typically not allowed to lend money at that rates that are lower than the MCLR.

The Marginal Cost of Funds, according to the Lending Rate, is the lowest lending rate below which a bank may not lend. The MCLR replaced the previous base rate mechanism in determining commercial bank lending rates.

On the 1st of April, 2016, the RBI implemented MCLR to establish lending interest rates. It is an internal reference rate that is used by the banks to establish the amount of interest that they could charge on loans. They would consider the additional or also the incremental cost of securing an additional rupee for a prospective customer.

How to Find the MCLR?

In the case of knowing the interest amount, or EMI amount, you can always use an online calculator. For instance, if you want to choose the ICICI Bank, you can use the ICICI Home loan emi calculator – and your answer will be right in front of you. Here is how you can find the MCLR.

As previously stated, MCLR is tenor-linked. As a result, each bank sets its own rates based on how much time is left to repay the loan. Simply put, every rupee a bank arranges for its borrowers incurs an added expense, which eventually sets the rate of interest.

Essentially, MCLR considers the following parameters:

1) Marginal Costs: As the name implies, this is a vital component of MCLR. This is the expense to the bank of arranging the cash that it will then lend to a borrower and profit from. The marginal cost is composed of two components: the marginal cost of borrowing (92% weightage) and the return on net worth (8% weightage). The marginal cost of the fund is the average rate at which the bank raised deposits of equivalent tenor from its customers during the specified time. The 8% return on net worth is the capital that the bank must keep aside as a safety net for lending, often known as Tier-1 capital.

2) Premium for the Tenure: The risk connected with a loan increase as the duration or period of repayment increases. This is because the lender has less vision of the borrower’s remote future prospects than the borrower’s immediate future. As a result – banks charge a higher interest rate to reflect this increased risk in order to offset the danger of loss. This is known as the tenor premium.

3) Operating Costs: Banks incur a variety of expenditures and overheads to run their day-to-day operations, such as rent and salaries. Except for certain loan-related fees such as security creation, which are recovered separately from borrowers, this heading includes these costs. Banks with more efficient operations can reduce costs, resulting in reduced MCLR for clients.

4) CRR Negative Carry On: The cash reserve ratio, or CRR, requires banks to maintain a percentage of their capital in cash with the RBI, which generates no interest. This component of the MCLR formula accounts for the reality that some bank funds do not generate income.

Difference Between Base Rate and MCLR

Banks determine MCLR based on the structure and technique used. To summarize, this adjustment will profit borrowers. The MCLR is a greater type of base rate.

The final loan rate for the borrower will be determined using a risk-based strategy. It takes into account unique elements such as the marginal cost of funds over the overall cost of funds.

The repo rate – which was not included in the base rate, is factored into the marginal cost. Banks need to include all kinds of interest rates that they pay when mobilizing funds when calculating the MCLR.

Previously – the loan period was not considered in setting the base rate. Banks will now be obligated to include a tenor premium in the case of MCLR. This will enable banks to charge greater interest rates on long-term loans.

When to Disclose MCLR?

Banks would have the choice of making all loan categories available at fixed or fluctuating interest rates. Furthermore, banks must adhere to certain timelines when mentioning the MCLR. They could be one month, overnight MCLR, 3 months, a year, or any other maturity that is determined by banks.

For any loan maturities – the lending rate can’t be lower than the MCLR. Other loans, however, are not related to the MCLR. Loans against customer deposits, loans to bank workers, special loans run by the Government of India, and fixed-rate loans with tenures longer than three years, for instance.

The main goal of MCLR is to ensure that banks price loans to borrowers fairly, taking actual market conditions into consideration rather than opaque internal calculations. It definitely has numerous benefits.

However, while MCLR was better than the base rate system, it still did not reflect external benchmark rates, which meant that commercial banks were charging higher interest rates than what was required for good credit expansion in India’s fast-growing economy.


This is all that you require to know about MCLR and how it works. MCLR provides the much-needed break of reduced interest rates that borrowers require, but it is only available to borrowers with floating interest rates on home loans. The MCLR has no effect on house loan fixed interest rates. When calculating the marginal cost of funds, the bank takes into account both deposit balances and other borrowings.


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