The marginal cost of funds based lending rate (MCLR) is the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. The MCLR methodology for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016. This new methodology replaces the base rate system introduced in July 2010.
Banks have to review and publish their MCLR of different maturities every month — overnight, one-month, three month, six-month and one-year. Loans are benchmarked against a particular MCLR. For instance, home loans are mostly benchmarked against one year MCLR.
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Impact: Before the MCLR regime, banks were slightly slow to change their interest rate in accordance with repo rate change by the RBI. With the MCLR, banks have to review and publish their MCLR of different maturities every month on a pre-announced date. The final lending rates offered by the banks will be based on by adding the ‘spread’ to the MCLR rate.
