Despite a series of rate cuts over the past few years, many existing home loan borrowers were not getting the benefit of lower rates. To remedy this, the RBI had introduced the MCLR or Marginal Cost of Funds based Lending Rate which is more responsive to changing rates in the economy. It had also made it mandatory for banks to link their lending rates to it, for new borrowers from 1st April 2016.
What is changing?
The RBI had expected existing borrowers to migrate from the older ‘base rate’ to the MCLR. However, this was not happening in sufficiently large numbers.
The situation for older borrowers was as follows:
- Migrate to the MCLR on mutually agreed terms with the bank
- If their existing bank wasn’t letting them shift, they could approach another bank for funding based on MCLR
The RBI has now provided that from 1st April 2018, the base rate shall also be linked to the MCLR. Your actual rate will typically be MCRL + a spread, based on how risky you are as a customer.
What is MCLR?
The MCLR takes into account the marginal cost of funds which is linked to deposits and other sources of funds for banks. It is hence more sensitive to overall rates in the economy including the RBI’s Repo and Reverse Repo rates.
The MCLR rates have to be reviewed and declared once a month. These are overnight, one month, three months, six months, one year, two-year and three-year rates. The RBI further requires that the reset of the interest rates of loans based on the MCLR shall be at least once a year. In other words, a bank can tie you into a specific rate for a maximum period of one year.