Most trusted destination for latest India news, international news, top stories, newspaper columns, discussions, interviews and more

What is MCLR And How To Calculate It – a Quick Guide

MCLR stands for the Marginal Cost of funds based Lending Rate and is the smallest interest rate, below which a bank can’t lend money to a customer. Yes, there are exceptions everywhere, and MCLR is no different.

A few exceptions where a bank can charge higher than minimal interest rates on loan are permitted by the Reserve Bank of India (RBI).  Here you will know what is MCLR and how does it work?

How Does MCLR Work?

The MCLR replaced the current base rate system with a new approach for deciding the lending interest rate for commercial banks and lenders. The MCLR came into existence on 1st April 2016 and was introduced by the RBI to determine the interest rates for advances.
The MCLR is an internal rate of interest for banks (for reference) to decide on the minimum home loan interest rates. To do this, banks consider the incremental or additional cost of arranging extra rupee for a potential customer/buyer. One of the major reasons for introducing MCLR was the intention of the RBI to encourage more customers to avail loans at a lower rate.
Earlier when the RBI reduced the repo rate, it took banks a long time to reflect it in their lending rates for customers.
However, under the new MCLR regime, banks are forced to adjust their lending rates for customers soon after a change in the repo rate.

Calculation of MCLR – Let’s Know How It Is Done

The calculation of MCLR is associated with the duration or the amount of time that is remaining for the repayment of the loan. This duration-based benchmark is internal in nature. The determination of actual lending rates is calculated by taking to account many elements to this tool. The banks then only circulate their MCLR after studying it. The evaluation and circulation are done for fluctuating maturities, as per a pre-decided date or monthly.
The four major elements that lead to the actual calculation of the MCLR comprises of the following:

1) The Tenor Premium

There is consistency in the tenor periods for all types of loans for the said/discussed residual tenor. It simply means that the premium of the tenor is not detailed to a class of loan or a customer.

2) The Marginal Cost of Funds

The concept is relatively fresh and new in the MCLR and compromises of elements such as return on net worth and the Marginal cost of Borrowings. The Marginal cost of Borrowings’ worth is 92% while the remaining 8% is for ROI on net worth in the Marginal cost of Funds.  

3) Operational Costs

The operating cost is associated with the cost of raising funds, excluding the cost recovered distinctly by the method of service charges. As a result, it is, hence, connected to offering the loan offering as such.

4) Negative Carry on Account of Cash Reserve Ratio (CRR)

The significance or need for the negative carry (Cash Reserve Ratio) takes place because of the return on the CRR balance is nil. In this situation when the actual return is lower than that of the cost of the funds, that’s where the negative carry on compulsory Statutory Liquidity Ratio Balance comes or arises.

How Is Mclr Different From The Base Rate?

MCLR can be seen as an improvement of the vanilla base rate. It took a lot of time for banks to reflect in the overall lending rate after the announcement of repo rate by RBI.
As a result, banks could enjoy by charging a higher interest despite rates going down. Not any more, the MCLR has led to an instant reflection of the lowered rate after the announcement by the RBI.
Hence, it has led to many more customers opting for home loans. However, any loan with a longer period may see a higher rate charged by the banks as per the rules.

The Bottom Line


You just went through some quick insights into the calculation of MCLR and aspects that comprise it. If you were to apply for a home loan shortly, you can make the most of the MCLR interest rate and pay lower EMIs. All the best!