Owning property is almost every earning individual’s dream. However, not many people might be able to afford to pay the full amount for the property with the money in hand. This is where the concept of a home loan comes into the picture. However, even with options like a joint home loan, the idea of mortgaging may sound daunting to many. Today, MCLR has drastically changed the way people look at mortgaging. Let us try and understand what MCLR is.
MCLR is an abbreviation for the Marginal Cost-based Lending Rate. This concept was introduced by the State Bank of India(SBI) in the year 2016. With MCLR, a new and better benchmark has been set, which the banks will have to use while lending money to their new borrowers. Before MCLR, money was lent based on a regular base rate that was fixed.
The working of MCLR is based on four components. The four components are – tenor premium, cost of operations, cost of funds, and the negative carry (the Cash Reserve Ratio(CRR) is used to calculate this component). In layman terms, the cost at which money is borrowed and lent is termed the marginal cost of funds. All other costs, including the cost of granting loans fall under operational costs. In the case of a home loan, the costs of raising funds also come under the cost of operating. MCLR is linked to the actual deposit rate of the home loan.
Objectives of introducing MCLR
- It ensures competition among banks and helps them improve their worth
- With MCLR, loans are available at interest rates that are fair to both the parties involved – the lenders and the borrowers
- It ensures transparency in the way home loan interest rates are calculated by the banks
Key differences between the base rate and MCLR
- MCLR depends on the repo rate changes made by the RBI. The base rate is independent of repo rates fixed by the RBI.
- Factors that influence MCLR include Cash Reserve Ratio, tenor premium, operating costs, and the marginal cost of funds. The base rate is dependent on various factors, such as bank deposit rates, bank costs, etc.
The Reserve Bank of India (RBI) has made it mandatory for banks to set a minimum of 5 MCLR rates. The five rates are for – a year, half a year, three months, a month, and overnight. NBFCs and independent banks are free to set as many MCLR rates as they desire. Since banks cannot afford to perform a monthly analysis, analysis of MCLR rates is done quarterly.
The working of MCLR
Your home loan can be linked to MCLR if it is taken on a floating home loan interest rate. With most banks, you can select from five to seven MCLR rates that they provide. However, with respect to mortgages, you can only choose between a six month or a year MCLR. For a long-term loan such as home loans, banks, and other lenders get to fix the tenor.
Since banks have no say in fixing the base rates, people who have existing loans should continue repayments with the same base rate. However, they may eventually shift to loans based on MCLR rates.
Calculation of MCLR
All the borrowing sources of a bank are considered to calculate MCLR. Some of the sources include savings accounts, current accounts, and FDs. The rate of interest from these borrowing sources is used to calculate the marginal borrowing cost.
The Reserve Bank of India has given the following formula to calculate the MCLR:
Marginal cost of funds (MCF) = Marginal borrowing cost (MBC) x 92% + net worth return (NWR) x 8%
MCLR rates offered by some popular banks
| Bank Name | 3yrs | 2yrs | 1yr |
|---|---|---|---|
| SBI | 8.2% | 8.1% | 7.9% |
| Axis Bank | 8.5% | 8.45% | 8.35% |
| HDFC Bank | 8.35% | 8.25% | 8.15% |
| Union Bank of India | 8.45% | 8.4% | 8.25% |
