Unraveling the MCLR Rate and Its Impact on Home Loans

The Marginal Cost of Funds-based Lending Rate (MCLR) is a relatively new method of determining interest rates on loans in India, introduced in 2016 to replace the base rate system. This is supposed to make it easier for banks to set lending rates for various loans.

What is the MCLR Rate?

To understand how the MCLR rate works, it is important to note that banks raise funds from various sources, such as deposits from customers and borrowings from the market. The cost of these funds varies and thus, the interest rate that a bank offers on loans may also change.

The MCLR rate is essentially the minimum interest rate that a bank can lend at. This rate is based on the bank’s marginal cost of funds, which includes the cost of deposits and other borrowings.

The Reserve Bank of India (RBI) introduced the MCLR system to improve transparency in fixing the interest rate on loans. Banks are required to make their MCLR rates available to the public, and they must review and publish these rates at least once a month.

Calculation of MCLR Rate

The MCLR rate is calculated based on several factors, including the repo rate, the bank’s operating costs, the cost of deposits, and the Statutory Liquidity Ratio (SLR) rate. The repo rate is the rate at which the RBI lends money to banks, while the SLR rate is the amount of money that banks are required to maintain as reserves.

The MCLR rate is calculated by adding the repo rate and the bank’s spread to the cost of funds, which includes the cost of deposits and other borrowings. The spread is the profit margin that the bank wishes to make, and it varies from bank to bank.

Impact of MCLR Rate on Home Loans

The MCLR rate has a direct impact on home loans, as it determines the interest rate that a borrower must pay. The interest rate on home loans is typically linked to the MCLR rate, and it may be fixed or floating.

If the MCLR rate increases, the interest rate on home loans will also increase. This may result in higher monthly EMIs for borrowers, making it more difficult for them to repay their loans. Conversely, if the MCLR rate decreases, the interest rate on home loans will also decrease, making it easier for borrowers to repay their loans.

However, it is important to note that the MCLR rate is not the only factor that determines the interest rate on home loans. Other factors, such as market conditions, the borrower’s credit score, and the loan amount and tenure, also play a role.

Recent Developments with MCLR Rate

Recently, there has been a significant gap between the rise in median MCLR and term deposits, with the former increasing by over 40 basis points beyond the latter. This raises concerns over the pass-through of rate hikes to depositors and also whether banks are complying with the loan pricing regulations appropriately.

This has led to calls for a transition to a system that links interest rate on deposits to external benchmarks, such as the repo rate. In October 2019, RBI mandated all banks to mandatorily link all new floating-rate personal, retail, and SME loans to external benchmarks from October 1, 2019. This move was aimed at improving transparency, effective transmission, and fairness of interest rates.


In conclusion, the MCLR rate is an important factor that affects the interest rate on home loans. Borrowers must be aware of the current MCLR rate and how it may impact their monthly EMIs. Banks must also ensure that they comply with all loan pricing regulations and that they pass on the benefits of rate cuts to borrowers in a timely and transparent manner. With the recent developments in benchmark linking, the hope is that there will be greater transparency and fairness in loan pricing in the future.

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