The Marginal Cost of Fund based Lending Rate (MCLR) was introduced by the Reserve Bank of India (RBI) in 2016. MCLR is linked to the monthly instalments of a home loan. Before the introduction of the MCLR rate, bank loans were linked to the bank’s base rate. Today, RBI guidelines state that all commercial banks are to set their interest rates based on the MCLR, which replaced the base rate system on 1st April 2016.
The purpose of doing so was to ensure that home loan borrowers could enjoy the benefits of the rate cuts.
Understanding the base rate system and MCLR
The critical difference between the base rate system and MCLR is marginal cost calculation. In the base rate system, the marginal cost was calculated by considering the average interest rates of bank deposits. With MCLR, the repo rate is included in the marginal cost. It means that the latest interest rates of loans will now be subject to periodic changes in repo rates.
So, borrowers can benefit if there is a cut in the repo rate. However, note that India’s home loan interest rate can increase if the RBI decides to increase the repo rate.
The MCLR regime only applies to banks like IDFC FIRST Bank, not Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs). HFCs are known to link their interest rates to the Retail Prime Lending Rates Regime.
How does MCLR affect reset periods?
During the base rate era, home loans with floating interest rates were expected to move following policy rates. So, borrowers could expect a home loan interest rate cut whenever the RBI reduced its policy rate. It applied to both new as well as existing borrowers. However, when it comes to MCLR, a home loan interest rate is re-priced on a periodical basis.
Most banks, including IDFC FIRST Bank, offer home loans linked to MCLR, which is reset yearly. So, a borrower might have to wait slightly longer to see the effect on their EMI payments if the RBI slashes their repo rate given the reset period mentioned in their home loan agreement.
So, let’s say a borrower took a home loan in September 2017 linked to MCLR that is reset yearly, and the RBI cut down the repo rate in October 2017. It does not mean the borrower can expect their EMIs to fall immediately.
They will be able to see a change in their EMI payments only in September 2018. So, when looking for the best bank for a home loan, it is advisable to choose a bank only after ensuring that it offers a suitable repayment tenure, affordable interest rate, and sufficient loan amount. Also, read the loan agreement terms to understand the reset period, prepayment charges, processing fees, etc.
IDFC FIRST Bank fulfils all the requirements. The bank offers a digitised process for loans up to ₹5 crores and tenures of up to 30 years. The eligibility criteria are relaxed for both salaried and self-employed customers, while you can also receive up to 100% top-ups at the same rate as balance transfer.
Also Read: Applying For a Bank Loan