Definition
MCLR (Marginal Cost of Funds Lending Rate)
MCLR is an internal benchmark that determines the minimum interest rate at which a bank can lend, based on its cost of funds.
The Marginal Cost of Funds based Lending Rate (MCLR) is a benchmark set by each bank using its own cost of borrowing, operating costs and a tenure premium. Floating-rate loans linked to MCLR have a reset period (such as six months or a year), so rate changes pass through to borrowers only at reset dates.
Because MCLR is internal to the bank, banks were sometimes slow to pass on RBI rate cuts. To improve transmission, the RBI introduced external benchmark lending rates like the RLLR, which most new retail floating loans now use.
Borrowers on older MCLR-linked loans can often switch to a repo-linked rate, which may respond faster to RBI rate changes.
Related terms
- EMI (Equated Monthly Instalment)An EMI is the fixed monthly payment you make to repay a loan, combining both principal and interest.
- Fixed vs Floating Interest RateA fixed-rate loan keeps the same interest rate throughout, while a floating-rate loan's rate moves with a benchmark over time.
- Repo-Linked Lending Rate (RLLR)RLLR is a lending rate tied directly to the RBI's repo rate, so changes in the repo rate quickly flow through to borrowers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.