What is MCLR?

Marginal Cost of Funds based Lending Rate (MCLR)This is a new method for calculation of BASE rate by banks suggested by RBI which is expected to allow faster transmission of changes in policy rates ie., increase of decease in repo and reverse repo rates by the Reserve Bank of India to bank’s lending rates, which inturn is said to bring more transparency in calculation of rates according to experts.

People who opt for this change ie., MCLR method of calculation should also be ready for frequent changes in the EMI or period of loan.  To quote it more precisely, RBI has in the recent times, cut the rates four times, meaning that the EMIs should have also come down simultaneously which did not since banks preferred to either raise or reduce the period of loan rather than modifying the EMIs.

Impact

The main area which will have its impact will be the HOME loan portfolio, since it is for a longer duration.  There will be some effect on loans against properties or mortgage loans.  However in cases where the loan period is 30years (which is the maximum) extending the period further may not be possible, however, the EMI in these cases will have to be revised.  In today’s scenario, when interest rates are increased by RBI, interest rates don’t go up immediately in banks, and this change is brought in by RBI so that the transmission of interest rates goes smoothly.  This also paves way for banks to specify interest reset dates on their floating rate loans, which can either be linked to the date of sanction of loan or the date of review of MCLR.

One more thing on the transparency issue is that today when RBI cuts REPO rates, banks do not cut their lending rates, quoting the reason as the increase in their overall cost of funds.  However, when RBI increases their rates, banks raise their lending rates quoting the reason that their marginal cost of funds has increased.
Experts therefore suggest that borrowers should switch over to MCLR once it is implemented.