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MCLR explained: Meaning, calculation and its impact on loans

By Tata Capital
23 June 2026
11 mins read
2639

Summary

MCLR, or Marginal Cost of Funds-Based Lending Rate, is the minimum interest rate below which banks generally cannot lend. It plays an important role in determining interest rates for floating-rate loans such as home loans and personal loans. Changes in MCLR can affect your EMIs or loan tenure over time. Understanding how MCLR is calculated, how it differs from the base rate, and how reset periods work can help borrowers make more informed loan decisions.

The MCLR rate is the minimum interest rate below which banks generally cannot lend to borrowers.

Have you ever wondered why interest rates on loans keep changing even after the borrower has already taken the loan? While factors like your credit score, monthly income, and employment stability help lenders determine loan interest rates at the time of approval, another crucial factor that continues to influence the rate throughout its tenure is MCLR.

The MCLR rate plays an important role in the banking system because it serves as the minimum interest rate below which banks typically cannot lend. Whether you are planning to take a home loan, personal loan, or business loan, understanding MCLR can help you decipher how banks decide lending rates and why your EMI may increase or decrease over time.

In this blog, we will explain what MCLR means, how MCLR is calculated, different types of MCLR rates, and its impact on loans and EMIs in simple words. Keep reading.

What is MCLR?

The MCLR full form is Marginal Cost of Funds-Based Lending Rate. It is the minimum interest rate below which banks in India are not permitted to lend money, except in certain special cases.

Under the MCLR framework, lenders calculate the minimum lending rates based on factors such as cost of funds, operating expenses, cash reserve requirements, and loan tenure. Then they add a spread or margin to the applicable MCLR rate to determine the final interest rate charged to borrowers.

The Reserve Bank of India (RBI) introduced the MCLR system in 2016 to make loan interest rates more transparent and ensure faster transmission of policy rate changes to borrowers. Before MCLR, banks used the base rate system, in which changes in the RBI repo rate were not always promptly passed on to customers.

When was MCLR introduced in India?

The RBI introduced the MCLR system in India on 1 April 2016. Before MCLR, loan interest rates were mainly linked to the base rate decided by banks. However, the system was criticized because borrowers did not always benefit from falling interest rates in a timely manner. Banks were often slow to reduce lending rates, even when the RBI lowered the repo rate.

The introduction of MCLR helped improve the transmission of RBI policy changes to loan interest rates. As a result, borrowers could experience faster changes in loan EMIs and interest rates whenever banks revised their MCLR rates.

Why was MCLR introduced?

The RBI introduced the MCLR system to improve transparency in loan pricing and ensure that changes in policy rates were passed on to borrowers more quickly. Under this system, lenders calculate lending rates based on their actual cost of funds and other important factors. As a result, loan interest rates became more market-linked and transparent.

Another important reason behind introducing MCLR was to promote fair lending practices. The system aimed to make loan pricing more systematic and to help borrowers understand how lenders set interest rates for home loans, personal loans, and other credit products.

What are the types of MCLR rates offered by banks?

Banks offer different types of MCLR rates based on loan tenures and reset periods. These rates are revised periodically and may vary from one bank to another. Different loan products are linked to different MCLR rates.

Overnight MCLR: Applicable for very short-term loans, typically borrowed for only a day.
One-month MCLR: Applicable for short-term loans that need to be repaid within a month.
Three-month MCLR: Applicable for short-term loans with a three-month reset period.
Six-month MCLR: Applicable for medium-term loans, such as small business loans and personal loans.
One-year MCLR: Applicable for long-term loans that are repaid over several years. For example, home loans.

How is MCLR calculated?

Banks calculate the MCLR rate using various RBI-prescribed formulas and guidelines. The calculation primarily focuses on the bank’s cost of raising funds and the expenses associated with lending to borrowers.

Here are the four main components that banks use to calculate MCLR:

Marginal cost of funds: It includes the expenses incurred by the bank for obtaining funds for lending.
Operating costs: These include expenses related to running banking operations, such as employee salaries, branch rent, administrative expenses, and loan processing costs.
Cash Reserve Ratio (CRR): Banks are required to maintain a certain portion of deposits with the RBI as CRR. Since banks do not earn interest on this amount, they factor in the associated costs when calculating the MCLR.
Tenor premium: Banks add a tenor premium for loans with longer tenures. They do this to offset the risk of non-payment.

After considering these factors, banks set different MCLR rates for loan tenures such as overnight, one-month, three-month, six-month, or one-year.

What is the base rate, and how is it different from MCLR?

Before the MCLR system was introduced, banks used the base rate to determine minimum lending rates for most loans. However, base rates did not reflect actual fund costs. It depended more on internal bank costs and less on monetary policy changes. As a result, borrowers were not getting the immediate benefits of the RBI’s interest rate changes.

The table below depicts the difference between the base rate and MCLR based on crucial aspects:

Basis	Base Rate	MCLR
Meaning	Minimum lending rate for banks under the older system.	MCLR stands for Marginal Cost of Funds-based Lending Rate.
Introduced In	2010	2016
Calculation Method	Determined individually by banks, considering the average cost of funds.	Calculations are based on the RBI’s guidelines and consider the marginal cost of funds, repo rate, and other factors.
Transparency	Lower transparency, as it depends on individual banks.	Higher transparency.
Interest Rate Transmission	Relatively slower.	Faster transmission of RBI rate changes.
Overall Approach	More rigid and less sensitive to monetary policy changes.	Dynamic and market-linked.

How does MCLR affect loan interest rates?

MCLR plays a crucial role in influencing loan interest rates, especially for floating-rate loans such as home loans, business loans, and loans against properties. When a bank increases its MCLR, the interest rate linked to floating-rate loans also increases. This, in turn, leads to an increase in the EMI amount or loan tenure.

Similarly, when a bank lowers its MCLR, the interest rate on floating-rate loans also decreases. This, in turn, leads to a decrease in the EMI amount or loan tenure.

Compared to repo-linked loans, MCLR-based loans may respond slightly more slowly to RBI repo rate changes because banks revise the MCLR after considering multiple internal cost factors. Repo-linked lending rates are directly connected to the RBI repo rate, which often leads to quicker transmission of interest rate changes to borrowers.

What is the impact of MCLR on the economy?

MCLR plays an important role in the overall banking and financial system because it directly affects borrowing costs and loan interest rates. Changes in MCLR can affect how easily individuals and businesses can borrow money for spending, investment, or expansion.

For instance, when MCLR rates fall, loans become cheaper. This encourages individuals and businesses to borrow more. And increased borrowing leads to credit growth in the economy. Similarly, when MCLR rates rise, borrowing becomes more expensive. This reduces loan demand and slows economic expansion.

MCLR also affects liquidity in the banking system because banks adjust lending rates based on their funding costs, deposit rates, and overall market conditions.

What are the benefits of MCLR for borrowers?

The MCLR system was introduced to make loan interest rates more transparent and borrower-friendly. It helped improve how banks pass on changes in RBI policy rates to customers and brought greater clarity to loan pricing.

● Enhanced transparency:

The MCLR system has helped in improving transparency in how banks calculate the minimum lending rate.

● Better rate transmission:

The MCLR system helps in faster transmission of RBI’s repo rate cuts as compared to the older base rate system.

● Competitive lending:

The introduction of the MCLR system has forced the banks to offer loans at competitive interest rates.

● Structured loan pricing:

Banks use a defined framework to calculate lending costs and interest rates.

What are the limitations of the MCLR system?

Although the MCLR system has helped improve transparency in loan pricing, it also has certain limitations:

Delayed transmission of rate cuts: Banks may not always reduce the MCLR rates immediately after the RBI’s repo rate cuts.
Reset period restrictions: Loan interest rates are revised only after the reset date mentioned in the loan agreement. Until then, borrowers may continue paying the old rate.
Slower than repo-linked loans: Repo-linked loans usually respond faster to RBI policy rate changes than MCLR-based loans.
Different rates across banks: Since each bank calculates MCLR separately, loan rates may vary from one lender to another.

How to check your bank’s latest MCLR rate?

You can check your bank’s latest MCLR rate by visiting its official website. As per the RBI guidelines, all registered banks in India must publish their minimum lending rate, or MCLR, for various loan tenures every month. These tenures may include overnight, one-month, three-month, six-month, and one-year.

You can also visit the nearest bank branch or contact customer support to know the current applicable MCLR rate for their loans.

The RBI also releases regular disclosures that include the MCLR rates for top private and PSU (Public Sector Undertaking) banks in India.

Is it mandatory to link loans to MCLR?

It depends on the type of loan, the date, and the financial institution from which the loan was taken. With effect from 1 October 2019, the RBI’s external benchmarking system has replaced the MCLR system for calculating lending rates for home loans, business loans, and other loans. The new system applies to all loans with floating interest rates. It does not apply to fixed-interest rate loans.

Another thing to note is that the new external benchmarking system applies only to loans taken from banks. Non-Banking Financial Companies (NBFCs) are not within its purview.

That is why some lenders may still offer MCLR-linked loans depending on their internal policies and loan products. Existing borrowers may also have the option to switch from the base rate or MCLR to another benchmark, subject to applicable conversion charges or processing fees.

How to switch from base rate to MCLR?

Most banks have already switched to the MCLR system for determining lending rates for loans disbursed after April 2016. However, if your loan is still based on the older base rate system, you can approach your bank and request the switch. You can do this online by visiting the bank’s official website, by a telephone call to the customer support team, or by physically visiting your bank’s nearest branch. The bank may levy a nominal fee for the conversion.

What are the MCLR disclosure rules and reset frequencies?

As per the RBI guidelines, all registered banks in India are required to publish their MCLR rates by the last working day of each month. Furthermore, banks must display these MCLR rates on their official websites and in their branches. This helps maintain transparency and allows borrowers to stay informed about the minimum interest rates applicable to their loans. Banks usually publish separate MCLR rates for different loan tenures, such as overnight, 1 month, 3 months, 6 months, and 1 year.

For borrowers, the actual loan interest rate does not always change immediately whenever the bank revises MCLR. MCLR-linked loans generally follow a reset cycle mentioned in the loan agreement. Depending on the loan type, the reset frequency may be monthly, quarterly, half-yearly, or yearly. The change in interest rates comes into effect only on the reset date.

The bottom line

MCLR is an important benchmark that helps banks decide loan interest rates in India. Understanding what MCLR is in banking can help you understand why your loan EMIs or tenure increase or decrease over time. The system was introduced in 2016 to improve transparency and ensure faster transmission of changes in the RBI policy rate to borrowers.

Most banks have already shifted to MCLR or an external benchmarking system to determine interest rates on loans disbursed after April 2016. However, if your loan is still based on the base rate system, you can request that your bank switch to the MCLR system.

FAQs

What is MCLR in simple terms?

MCLR is the minimum interest rate set by a bank for giving loans. Banks are not allowed to lend below this rate. Home loans, personal loans, and other floating-rate loans may be linked to MCLR. If the MCLR changes, your loan interest rate and EMI may also change later.

How often do MCLR rates change?

Banks normally review and update their MCLR rates once every month. But borrowers may not see an immediate change in their loan EMI because loans follow a reset period. Depending on the loan agreement, the revised rate may apply monthly, quarterly, half-yearly, or annually.

Is MCLR better than the base rate?

MCLR was introduced to improve the older base rate system. Under MCLR, banks usually pass on RBI rate changes to borrowers more quickly. It also made loan pricing more transparent. Many borrowers received better interest rate benefits under the MCLR than under the earlier base rate method used by banks.

Does MCLR affect existing loans?

Yes, MCLR affects floating-rate loans that are linked to the MCLR benchmark. If the bank changes its MCLR, the interest rate on the loan may also change after the reset date. This can increase or reduce the borrower’s EMI amount or repayment period, depending on the revision.

Can I switch my loan from base rate to MCLR?

Yes, many banks allow borrowers to move their loans from the old base rate system to MCLR. Some banks may charge a small fee for the conversion. Before switching, borrowers should carefully compare the new interest rate, EMI amount, and other loan terms.

What is the difference between MCLR and repo rate?

MCLR is a lending benchmark decided by banks using their own funding and operating costs. The Reserve Bank of India decides the repo rate. It is the rate at which banks borrow money from the RBI. Repo-linked loans usually react faster to RBI rate changes.

Where can I check current MCLR rates?

You can check the latest MCLR rates on your bank’s official website. Most banks publish these rates every month under the loans or interest rates section. Borrowers can also visit the bank branch or contact customer care to know the current MCLR applicable to their loans.

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