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Definition
The Marginal Cost of Funds-based Lending Rate (MCLR) is a benchmark lending rate that banks must use as a floor for most rupee loans, introduced by the RBI with effect from 1 April 2016 via its Master Circular on Interest Rates on Advances. MCLR replaced the earlier Base Rate system because the Base Rate used average cost of funds, which was slow to transmit monetary policy changes. MCLR is computed using the marginal (latest) cost of funds, making it more responsive to RBI rate changes. Banks publish overnight, 1-month, 3-month, 6-month, and 1-year MCLR. Most retail loans — home loans, vehicle loans, MSME loans — are linked to the 1-year MCLR. As of 2019, however, RBI mandated that all new floating-rate retail and MSME loans be linked to an External Benchmark Lending Rate (EBLR) — either RBI Repo Rate, 3-month T-Bill, or 6-month T-Bill — making MCLR less relevant for new borrowers while it continues to apply to legacy loan books.
How It Is Calculated
MCLR = Marginal Cost of Funds + Negative Carry on CRR + Operating Cost + Tenor Premium. The four components:
- Marginal Cost of Funds: Weighted average of the marginal cost of different liability categories (retail deposits, bulk deposits, borrowings) at current rates — the largest component (~92% weight).
- Negative Carry on CRR: Compensation for the zero-return CRR balance. = CRR% × (MCLR – 0) expressed as a spread.
- Operating Cost: Staff, branch, compliance costs allocated to loan portfolio.
- Tenor Premium: Additional spread for longer MCLR tenors to compensate for duration risk.
Banks are required to review and publish MCLR on a monthly basis. The actual loan rate = MCLR + Spread (where spread is bank's credit-risk premium for the borrower segment).
Why It Matters for Investors
- Loan repricing speed: When RBI cuts repo, MCLR-linked loans reprice only at the next reset date (typically 12 months). EBLR-linked loans reprice within 3 months. This determines how quickly EMIs change for existing borrowers.
- Bank NIM watch: If deposit costs rise faster than lending rates (inverted transmission), bank NIMs compress. Monitoring 1-year MCLR vs 1-year deposit rates is a quick NIM proxy.
- Monetary transmission lag: RBI's 250 bps hike in FY2022-23 fully transmitted to MCLR only by mid-2023, with a lag of 6–9 months — important for debt fund managers modelling credit fund yields.
- Legacy loan book size: Large banks still carry significant MCLR-linked loan books (home loans originated pre-2019). These provide a sticky, higher-yielding asset base during rate cut cycles — temporarily protective of NIM.
Current Value + Recent History
SBI's 1-year MCLR as of early 2024 stands at approximately 8.65%, having risen from a trough of 6.65% in April 2022 — a 200 bps increase tracking (but lagging) the 250 bps repo rate hike cycle. HDFC Bank's 1-year MCLR is approximately 9.10%. The spread between MCLR and repo rate (currently 6.5%) reflects operating costs and the CRR negative carry effect — typically 175–225 bps. The gap has widened slightly since 2022 as deposit competition has pushed marginal deposit costs higher, increasing the marginal cost of funds. Future rate cuts by RBI would be expected to reduce MCLR with a 1–2 quarter lag for MCLR-linked borrowers.
Worked Example
Comparing MCLR vs EBLR loan repricing for a ₹50 lakh home loan:
- MCLR-linked loan (pre-Oct 2019): Rate = 1Y MCLR (8.65%) + 25 bps spread = 8.90%. If RBI cuts repo by 50 bps in June 2024, MCLR reduces approximately 40 bps by September 2024 (one reset cycle). New rate ≈ 8.50%. Monthly EMI on ₹50L / 20-year loan falls by ≈ ₹1,400.
- EBLR-linked loan (post-Oct 2019): Rate = Repo (6.5%) + 250 bps spread = 9.00%. Same 50 bps RBI cut → EBLR reset within 3 months → new rate 8.50%. Borrower benefits faster.
- Investor implication: Banks with high MCLR legacy books see slower NIM compression when rates fall — slightly more resilient bank stock in an easing cycle, but at the cost of slower loan growth.
See Also
- Repo Rate
- Cash Reserve Ratio (CRR)
- Treasury Bill (T-Bill)
- Home Loan Rate Types — MCLR vs EBLR
- Reserve Bank of India
Primary Source
RBI Master Circular — MCLR (April 2016) | RBI Circular — External Benchmark Lending Rate Mandate (October 2019)
This glossary entry is for educational purposes only and does not constitute investment advice. Mutual fund investments are subject to market risks. MintByte Research is AMFI-registered (ARN-314872) and APMI-registered (APRN-01658). Past performance is not indicative of future returns.