Difference Between MCLR and RLLR: Key Points Explained

To ensure transparency and fairness for borrowers, lenders use specific benchmark rates to determine loan interest rates. These benchmarks vary across financial institutions based on internal policies. Two widely used benchmarks are the Marginal Cost of Funds-Based Lending Rate (MCLR) and the Repo Linked Lending Rate (RLLR).

Understanding the difference between MCLR and RLLR is crucial for borrowers, as it helps them comprehend how interest rates are determined and make informed financial decisions.

What Is MCLR?

The MCLR is the minimum interest rate at which a financial institution can lend to borrowers. It was introduced in April 2016 to replace the earlier Base Rate system. It is determined based on multiple factors like:

• Marginal Cost of Funds: This is the cost that lending firms incur to raise funds.
• Negative Carry On Cash Reserve Ratio (CRR): This is the cost lending institutions bear for maintaining mandatory reserves with the RBI, which do not earn interest.
• Operating Costs: These are the overheads and expenses incurred in maintaining operations.
• Tenure Premium: This is an additional charge for loans with longer repayment tenures, reflecting higher risk and uncertainty.

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Since MCLR is internally determined and not directly linked to the RBI’s repo rate, lending firms typically review and revise their MCLR rates monthly or quarterly, depending on their internal policies.

What Is RLLR?

The RLLR is an interest rate benchmark directly tied to the Reserve Bank of India’s (RBI) repo rate. It has two components, the repo rate and a spread.

The repo rate is the rate at which the RBI lends to commercial lending institutions. Any changes in this rate can directly impact the interest rate of RLLR-based loans, making it more responsive to changes in the country’s economic conditions.

The spread is an additional margin added by the lender, based on factors such as the borrower’s credit profile, the loan’s tenure, and the lender’s operational costs.

Since RLLR is directly linked to the repo rate, borrowers tend to benefit when the RBI reduces it, as this can lead to lower loan interest rates. However, it also means that interest rates can rise if the RBI increases the repo rate.

MCLR vs RLLR: Key Differences

The primary differences between MCLR and RLLR are as follows:

1. Benchmark Linking

MCLR is linked to a lending firm’s internal cost of funds, which can include factors like deposit rates and other expenses. It is not directly tied to the RBI’s repo rate.

The RLLR, on the other hand, is directly linked to the RBI’s repo rate. This makes it more responsive to changes in monetary policy. Any fluctuations in the repo rate can quickly impact RLLR-based loans.

2. Reset Period

The interest rate is reset periodically for MCLR, generally every six months to a year. The longer period gives a good time lag for adjustments to the EMIs for MCLR-linked loans. With RLLR, the reset period is much shorter, usually every three months, leading to faster adjustments in loan EMIs when the repo rate changes.

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3. Transmission Rate

Transmission rate refers to how quickly interest rate changes are passed on to borrowers.
Due to its internal cost-based nature, MCLR tends to have a slower rate of transmission. With RLLR, interest rate changes are generally transmitted faster, as they are directly linked to the repo rate. However, the speed and extent of transmission can vary across lenders, depending on their policies and operational factors.

Conclusion

Benchmarks such as MCLR and RLLR play a crucial role in promoting transparency and fairness in the lending process. Maintaining a strong credit score, stable income, and financial discipline can further improve an applicant’s chances of securing favourable interest rates on financial products such as home loans.

At SMFG Grihashakti, eligible home loan applicants can avail of competitive floating interest rates starting from 10%* p.a, linked to the Retail Prime Lending Rate (RPLR). Check your eligibility and apply for home loans of up to INR 1 crore* to meet your housing finance needs.