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How will MCLR linked loans work ?


What is MCLR ?

MCLR stands for "Marginal Cost of Funds based Lending Rate” (MCLR). From April 1 2016, all bank loans are being linked to banks MCLR in place of base rate. Earlier in 2010 RBI had introduced base rate linked loans to ensure faster transfer of rate cuts to consumers.But banks did not pass on all RBI rate cuts to their customers as they used different methods to calculate base rate.

Now RBI has introduced MCLR which is based on below listed components.

  • Marginal cost of funds;

  • Negative carry on account of CRR;

  • Operating costs;

  • Tenor premium.

Loans like Fixed interest loans with tenure more than 3 years, loan based on government schemes and loans to bank employees are exempted from MCLR guidelines.

Kindly note MCLR based loans are applicable only for banks and not NBFC’s.NBFC’s will continue to provide loans linked to BPLR(benchmark prime lending rate).

How will MCLR linked loans work ?

Floating rate offered by banks will be bank MCLR rate plus spread.

Example: Bank MCLR rate is 9.15% and spread offered is 0.20% then effective interest rate will be 9.15% + 0.20% = 9.35%

MCLR prevailing on the date of first disbursement (partial or full) shall be applicable on the floating rate loan. Banks will have to publish review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month on a pre-announced date.

Banks will have to specify reset date for MCLR linked loans in their loan contract and periodicity of this reset shall be 1 year or lower. Any change in MCLR between loan disbursement and date of reset will not affect your home loan rate. Thus any impact of change in MCLR rate will not affect your floating rate till reset date.Reset period can vary from one bank to another.

Example: Your sanctioned a home loan on 1st July 2016 at floating rate of 9.35% which is based on MCLR rate of 9.15% and spread of 0.20%. Your home loan lender has set MCLR reset date six months away in December

In September MCLR rate reduces to 9% but since your reset date is in December, your floating rate will continue to be linked 9.15% MCLR rate till then. MCLR rate prevailing on time of reset date in December will be used for calculation of floating rate.

MCLR vs Base rate ?

MCLR is based on current cost of funds for banks as compared to overall cost of funds for the banks.Thus MCLR rate lower as compared to base rate.Currently MCLR rates are 0.15-0.20% lower than bank base rates.

What about existing loans linked to base rate and prime lending rate(BPLR)?

Banks will continue to publish base rates till all loans linked to base rate are closed or migrated to MCLR linked loan.

Individuals with base rate linked or prime lending rate loan can shift to MCLR linked loans without any change in effective interest rate. Banks will change spread to ensure no change in effective interest rate.

Example: Bank XYZ has MCLR rate of 9.15%, Base rate of 9.30% and BPLR of 14.5%.

Case 1: Sachin has base rate linked loan with spread of 0.20%

Sachin’s base rate based floating rate = Base rate + spread = 9.30% + 0.20% = 9.5%

Sachin’s MCLR based floating rate =MCLR rate + spread = 9.15% + 0.35%=9.5%

Case 2: Rahul has BPLR based loan with 5% spread

Rahul’s BPLR rate based floating rate =BPLR - spread = 14.5% -5% = 9.5%

Rahul’s MCLR based floating rate =MCLR rate + spread = 9.15% + 0.35%=9.5%

If Sachin and Rahul wish to switch to new rate of 9.35% being offered to new customers, then they will have to pay conversion fee.

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