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MCLR

Loan & Credit

Marginal Cost of Funds Based Lending Rate

An internal benchmark lending rate used by banks to price floating-rate loans taken before October 2019. MCLR is set by each bank based on its cost of funds, and changes slower than the RBI repo rate.

Definition

Marginal Cost of Funds Based Lending Rate (MCLR) is an internal benchmark interest rate that commercial banks use to price their floating-rate loans. Introduced by the Reserve Bank of India (RBI) in April 2016, MCLR replaced the earlier Base Rate system to make loan rate changes more responsive to monetary policy.

Each bank calculates its own MCLR based on its marginal (incremental) cost of funds — primarily the rate it pays on deposits. Unlike the EBLR (External Benchmark Linked Rate) system used for new loans from October 2019, MCLR is an internal bank rate and responds to repo rate changes with a lag.

Millions of existing home loan borrowers who took loans between April 2016 and September 2019 remain on MCLR, making it still highly relevant despite newer benchmarks.

Formula

MCLR = Marginal Cost of Funds + CRR Cost + Operating Expenses + Tenor Premium

Where:

  • Marginal Cost of Funds: Weighted average of deposit rates (savings, FD, borrowings) based on fresh deposits
  • CRR Cost: Return foregone on cash held as CRR (Cash Reserve Ratio) with RBI
  • Operating Expenses: Cost of running the bank's credit operations
  • Tenor Premium: Additional cost for longer-tenure loans

Your loan rate = MCLR + Spread (the bank's credit risk and profit margin)

Worked Example

SBI's 1-year MCLR is 9.00%. Your home loan agreement states: Rate = 1-year MCLR + 0.25% spread = 9.25%, with a 12-month reset period.

The RBI cuts the repo rate by 0.50% over the next 6 months. SBI's MCLR drops from 9.00% to 8.65% over the same period.

Your loan rate update: At your next reset date (12 months), rate becomes 8.65% + 0.25% = 8.90% — a 0.35% reduction.

An equivalent EBLR borrower's rate would have dropped by nearly the full 0.50% within the same quarter the RBI cut rates. Use the home loan EMI calculator to see the EMI impact of a rate change.

Key Things to Know

  • MCLR vs EBLR — transmission speed: MCLR responds to repo rate changes slowly (due to bank's own cost of funds calculation + reset period lag). EBLR responds within the same quarter — it is directly tied to the repo rate. During a rate-cutting cycle, EBLR borrowers benefit faster.
  • Switching cost vs benefit: Most banks charge ₹3,000–₹5,000 to switch from MCLR to EBLR. If the rate difference is 0.25% on a ₹50 lakh loan, the savings are ₹10,417/year — recouping the switching cost in under a month. Switching is almost always worth it in a falling rate environment.
  • Spread is fixed for life: The spread added to MCLR (or EBLR) is negotiated at the time of the loan and remains fixed for the life of the loan. If you negotiated a high spread initially, consider refinancing to a lender offering a lower spread.
  • Repo rate connection: MCLR is indirectly linked to the repo rate — when the RBI raises rates, bank deposit costs rise, pushing MCLR up. But the transmission is delayed by 3–6 months (depending on how fast deposit rates reprice) plus the reset period of your loan.
  • Legacy borrowers: If your home loan was taken before April 2016, you may still be on the old Base Rate system — even older and slower to transmit rate changes. Switching from Base Rate to EBLR offers the most benefit.

Related Calculators

Home Loan EMI Calculator →Calculate your home loan EMI, total interest, and amortisation schedule instantly. Built for Indian borrowers — results in seconds.
Loan Amortization Calculator →Generate a complete loan amortization schedule with monthly principal and interest breakdown. See exactly how your home loan, car loan, or personal loan gets paid off.

Related Terms

Repo RateRepurchase Agreement RateEMIEquated Monthly InstalmentAPRAnnual Percentage RateAmortisationLoan Amortisation
Frequently Asked Questions
Is MCLR still relevant for new home loans?
No. From October 2019, all new floating-rate retail loans (home loans, car loans, personal loans) and MSME loans must be linked to an external benchmark — typically the RBI repo rate (EBLR). MCLR applies only to loans taken before October 2019 that haven't been switched to the EBLR system. New borrowers are on EBLR.
How often does MCLR change?
Banks must review and publish their MCLR at least monthly. However, MCLR-linked loans have a 'reset period' — typically 6 or 12 months — after which the loan interest rate is adjusted to the prevailing MCLR. This means even if MCLR changes monthly, your EMI only changes at the next reset date.
Should I switch my MCLR home loan to EBLR?
It depends on the current rate environment. When the RBI is cutting rates, EBLR-linked loans benefit faster — rate cuts pass through almost immediately. MCLR loans catch up slowly due to the reset period. If rates are rising, MCLR may feel like protection temporarily, but eventually it adjusts too. Switching involves a small fee (typically ₹3,000–₹5,000), but the savings from faster rate transmission can be significant.
What is the MCLR reset period?
The MCLR reset period is the interval at which your loan's interest rate is updated to reflect the current MCLR. Most home loans have a 6-month or 12-month reset period. A 12-month reset means that even if the RBI cuts rates by 1% today, your EMI won't change for up to 12 months.
How does MCLR differ from the base rate?
The base rate (used before 2016) was a cruder benchmark that didn't adequately reflect banks' actual cost of funds. MCLR replaced the base rate in April 2016 with a more scientific calculation based on marginal cost of funds, CRR cost, operating expenses, and tenor premium. EBLR then replaced MCLR for new loans from October 2019.