What is a MCLR Full Form In Banking?
MCLR Full Form In Banking is Marginal Cost of Funds Based Lending Rate, is a new benchmark lending rate introduced by the Reserve Bank of India (RBI) in 2016. It replaced the earlier benchmark lending rate system, the Base Rate, and was implemented with the aim of making bank lending rates more responsive to changes in market conditions. MCLR is now the primary benchmark lending rate used by banks in India for all floating rate loans, including home loans, personal loans, and business loans.
MCLR is calculated by taking into account the marginal cost of funds for the bank, which includes the cost of deposits, the cost of borrowing from other sources, and the cost of maintaining statutory reserves. The MCLR is then added to a spread or margin to arrive at the final lending rate. The spread is usually determined by the bank’s credit risk, overheads, and other factors.
Self-Occupied Property and MCLR
MCLR is particularly relevant for borrowers who have taken a home loan for a self-occupied property. In such cases, the MCLR serves as the benchmark rate for the loan, and any changes in the MCLR will impact the interest rate on the loan.
The interest rate on a home loan for a self-occupied property is typically linked to the MCLR of the bank, plus a spread. This spread is determined by the credit risk of the borrower and other factors, such as the loan-to-value ratio, repayment tenure, and the borrower’s income and credit score.
For example, if the MCLR is 7.5%, and the spread is 0.5%, the final interest rate on the loan will be 8%. If the MCLR were to increase to 8%, the interest rate on the loan would also increase to 8.5%. Conversely, if the MCLR were to decrease to 7%, the interest rate on the loan would decrease to 7.5%.
The Impact of MCLR on Home Loan Borrowers
The introduction of MCLR has had a significant impact on home loan borrowers in India. Prior to the introduction of MCLR, banks used the Base Rate system to determine the interest rate on loans. However, this system was not very transparent, and borrowers often had no idea how their interest rate was being calculated. Moreover, changes in the Base Rate were often not reflected in the interest rate on loans for several months, resulting in a lack of transparency and fairness.
With the introduction of MCLR, banks are required to review and reset their lending rates on a regular basis, usually once a quarter. This means that any changes in the market conditions, such as changes in the cost of funds for the bank, will be reflected in the MCLR and will impact the interest rate on loans.
Moreover, borrowers can now switch to a new bank or lender if they are unhappy with their existing interest rate. This was not possible under the Base Rate system, as borrowers were tied to their existing lender and could not easily switch to a new lender offering a lower interest rate.
In conclusion, MCLR is a new benchmark lending rate introduced by the RBI in 2016. It is calculated based on the marginal cost of funds for the bank and is used as the benchmark rate for all floating rate loans, including home loans, personal loans, and business loans. For borrowers who have taken a home loan for a self-occupied property, the MCLR serves as the benchmark rate for the loan, and any changes in the MCLR will impact the interest rate on the loan. The introduction of MCLR has brought greater transparency and fairness to the lending system in India and has given borrowers more control over their interest rates.