Your Loans are linked to MCLR- what’s that?

RBI has been working overtime to ensure that the end user, gets the benefit of the rate cuts done by the Central Bank. So, in April-2016 RBI directed the banks to move to Marginal Costs of Funds based Lending Rate more commonly known as MCLR. This translates into banks directly passing the benefits of lower cost for them to the end user.

MCLR demystified:

Before MCLR came into being Banks used Base Rate to determine the lending rates. Under the base rate system, it took a long time for the Banks to pass forward the benefits of rate cuts by the RBI. On the other hand, MCLR calculations are based on Deposit Rates offered by the Bank and the Repo Rate (set by RBI). These MCLR calculations are to be used to set internal benchmark lending rates based on Marginal cost of Funds.
The old system, Base Rate, was adjusted periodically as per RBI changed its policy rate, and rate cuts were passed down partially and with lot of reluctance. With the new guidelines in places, the MCLR has to be set every month, which makes the rate transmission much faster. It also requires bank to set the the benchmark rates (based on MCLR) for five different tenures- from 1 day to 1 year. It is for the banks to set benchmark rates for longer than 1 year, if they choose to. Except under the scheme for their own employees or Lending against Deposits placed with the them, the banks are NOT allowed to lend below the MCLR.

Benefits for Borrower:

Biggest beneficiaries of these are the home loan borrowers. Banks decide on the lending rate by applying a spread over the MCLR. The spread is based on the creditworthiness of the borrower, known as credit risk premium. Part of the spread is dependent on the tenor of the loan and the amount.
Existing borrowers can change their pricing by switching from Base rate linkage, shifting to MCLR. It can be done by paying a small processing fees to the bank. You may also negotiate with the bank on the spread it charges over the MCLR or Base rate. It is thus important to know your creditworthiness. You can avail Free credit reports for the same.

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