Marginal Cost of Funds based Lending Rate or MCLR came to effect from 1st April 2016. It is based on the repo rate, determined by the RBI.
Marginal Cost of Funds based Lending Rate was preceded by the base rate. The base rate lacked transparency and borrowers were almost never benefited from it.
Hence, to provide transparency in availing credits, MCLR was introduced. It is the minimum interest rate at which financial institution charge a credit.
Effect on Home Loan Interest Rate
Home loan interest rates are directly related to Marginal Cost of Funds based Lending Rate. Before its introduction, financial institutions used to take a considerable time before changing their base rate when RBI used to reduce their repo rate. Customers, unaware of the changes, were slow to enjoy or never received the benefits of the lowest home loan interest rate.
After the introduction of Marginal Cost of Funds based Lending Rate, it is now mandatory for a financial institution to change their lending rates with any changes that occur in the repo rate.
Purpose of Introducing Marginal Cost of Funds Based Lending Rate
It replaced base rate owing to fulfil following objectives –
- Improving transmission of repo rate into the lending rates of various financial institutions.
- Creating a fair interest rate for both lenders and borrowers.
- Ensuring the lending rates are competitive and subsequently improving the net worth of financial institutions.
The points mentioned above should provide you with a clear idea regarding what is MCLR and its effects on loans. Also, be aware that if you have already availed a home loan, changes in repo rate will affect only the floating interest rates.