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A Complete Guide to MCLR (Marginal Cost of Funds-Based Lending Rate)

Oct 14, 2022
A Complete Guide to MCLR (Marginal Cost of Funds-Based Lending Rate)

When we take a loan, we often have to pay high interest rates, and end up paying a significantly higher amount than borrowed. In some cases, interest rates are so high that there is barely a way to cut through them. To improve the situation and make it a better experience, MCLR came into the picture.

The MCLR full form is Marginal Cost of Funds-Based Lending Rate and refers to the minimum rate of interest that a lending institution usually charges.

However, certain burning questions pop up in the process. So, to know it better, let’s answer the question, “What is MCLR?” to know it better.

What Is MCLR?

The idea of MCLR first came in April 2016 and replaced the base rate system to help improve transparency and standardization in the methodologies followed by financial institutions while lending.

Earlier, banks and NBFCs used to offer loans to their borrowers at a Base Rate or below that as per their discretion, while some borrowers were offered loans at a higher rate. Introduction of MCLR helped in benefiting borrowers at large. This means financial institutions cannot grant any loan below a certain rate, except in some cases as permitted by the Reserve Bank of India (RBI). This in turn has brought reduced rates for borrowers.

The MCLR regime states that lending institutions should closely adjust their interest rates, especially after the change in repo rate. This is primarily done to enhance their structure and analyze the interest rates. Hence MCLR offers floating rate of interest and is subject to fluctuations. Usually, MCLR interest on home loans is lower than the Base Rate. MCLR is determined by the cost of funds, while Base Rates on loans is determined by average cost of funds.

The MCLR Calculations, Simplified

“Loan tenor” is a term that defines the time taken by a borrower to repay the loan. MCLR is calculated on loan tenor. Since MCLR is tenor-linked, every lending institution gets the privilege to decide the interest rates based on the time they have for repaying the loan. For every rupee that it accumulates to lend to their borrowers, a partial incremental cost is added, which is the primary factor in deciding the interest rate.

Thus, after careful consideration, lending institutions publish their MCLR. The process is similar for every loan. The primary parameters of the MCLR are:

1. Tenure Premium

The increase in loan repayment tenure gives rise to its risk:

  • The lending cost has marginal differences and varies from loan to loan.
  • The risks associated with the loan are proportional to the duration of the loan.
  • Risk management in lending institutions follows the principle of charging an extra premium called the Tenure Premium.

2. Cost of Operations

  • Lending institutions incur plenty of expenses after fund transactions. Most of these are operational costs associated with raising funds. All these charges are connected directly to the loans.

3. Marginal Fund Cost

The Marginal Fund Cost is the average interest rate in which deposits with similar maturities are raised. This is usually done before the review date and in an exact time frame. The balance book in the book counts this as an outstanding balance.

Other fund costs are associated with Marginal Funds, including other components like Net Worth and Marginal Cost of Borrowing.

4. CRR - Negative Carry

CRR, also known as Cash Reserve Ratio, is a certain proportion that every lending institution must submit to RBI in liquid cash. This is called “negative” because they can neither use the money nor charge interest on the same. The negative Carry on Cash Reserve Ratio is calculated using the below formula:

  • Required CRR * [Marginal Cost / (1-CRR)]

What is MCLR Rate?

As mentioned earlier, MCLR is counted as the minimum interest rate containing a specific limit and restricts financial institutions from lending money below that. It is an internal rate for financial institutions to determine the interest rates that can be levied on loans.

MCLR rates on home loans are dependent on a borrower’s lending risk. Property’s value, borrower’s CIBIL score and tenure also have a direct impact on the MCLR rate

The primary motive of MCLR is to ensure that everything is fair between lending institutions and their customers when they offer them a loan.


SMFG Grihashakti specializes in such situations by offering home loans at fair interest rates. Shortly after loan approval, the loan gets credited to your account. To know more about interest rates around home loans, you can check out now and use our online EMI calculator to understand the loan’s impact on your wallet better.

Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.

SMFG India Home Finance Co. Ltd. (Formerly Fullerton India Home Finance Co. Ltd.)
CIN number: U65922TN2010PLC076972

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