MCLR
Definition
Marginal Cost of Funds based Lending Rate — the minimum interest rate below which banks are not permitted to lend. Introduced by RBI on 1st April 2016, replacing the Base Rate system. MCLR is calculated based on 4 components: marginal cost of funds (92%), return on net worth (8%), operating cost, and CRR negative carry. Most existing floating-rate loans are linked to MCLR, though new retail loans since October 2019 use External Benchmark Lending Rate (EBLR/RLLR) linked to the repo rate.
Why is MCLR Important?
When applying for a loan in India—whether it's a home loan, personal loan, or car loan—the concept of MCLR plays a significant role in determining your total borrowing cost. Lenders use factors like this to assess credit risk, determine eligibility, and structure your EMI schedule. Understanding this term helps borrowers negotiate better interest rates, choose the right loan product, and save money over the loan tenure.
For accurate financial planning, it is highly recommended to use our free online calculators to see how MCLR impacts your specific scenario. Real-time calculations provide clarity on monthly outgoes, principal vs. interest components, and long-term financial burdens.
What is MCLR?
The Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate below which a bank cannot lend. It was introduced by the Reserve Bank of India (RBI) on 1st April 2016, replacing the earlier Base Rate system.
MCLR is an internal benchmark — each bank calculates and publishes its own MCLR based on its cost structure. Your loan interest rate = MCLR + Spread (bank's margin based on your risk profile). When a bank revises its MCLR, your floating-rate loan EMI changes at the next reset date.
How is MCLR Calculated?
MCLR is determined by 4 key components:
| Component | Weight/Role | What It Means |
|---|---|---|
| Marginal Cost of Funds | ~92% of total | The average rate at which the bank raised deposits of similar maturity recently. This is the biggest driver of MCLR. |
| Return on Net Worth | ~8% of total | Equivalent to the risk-weighted assets as denoted by Tier I capital. Ensures banks earn a minimum return on equity. |
| Operating Cost | Added | Cost of running the bank — staff, branches, technology — excluding costs recovered through service charges. |
| Negative Carry on CRR | Added | Banks must keep Cash Reserve Ratio (CRR) deposits with RBI at 0% interest. This 'lost' income is factored into MCLR. |
| Tenor Premium | Added per tenure | Higher loan durations carry more risk. Banks charge a premium for longer tenures, which is why 1-year MCLR > overnight MCLR. |
Types of MCLR Rates
Banks publish MCLR for multiple tenures. Your loan is linked to a specific tenure, which determines how often your rate resets:
| MCLR Type | Reset Period | Commonly Used For |
|---|---|---|
| Overnight MCLR | Daily | Very short-term interbank lending |
| 1-Month MCLR | Monthly | Ultra-short-term credit, overdrafts |
| 3-Month MCLR | Quarterly | Working capital loans, short-term personal loans |
| 6-Month MCLR | Semi-annual | Personal loans, SME loans, vehicle loans |
| 1-Year MCLR | Annual | Home loans, education loans (most common benchmark) |
| 2-Year MCLR | Biennial | Long-duration term loans |
| 3-Year MCLR | Triennial | Large project finance, infrastructure loans |
Key point: The 1-year MCLR is the most widely used benchmark for retail loans like home loans. If your home loan is linked to the 1-year MCLR, your interest rate resets once a year on your loan anniversary date.
MCLR vs Base Rate vs EBLR — Comparison
| Feature | Base Rate (pre-2016) | MCLR (2016-2019) | EBLR/RLLR (2019 onwards) |
|---|---|---|---|
| Introduced | July 2010 | April 2016 | October 2019 |
| Benchmark Type | Internal (bank decides) | Internal (formula-based) | External (repo rate) |
| Key Driver | Overall cost of funds | Marginal cost of recent funds | RBI repo rate directly |
| Rate Transmission | Very slow (months/years) | Moderate (at reset date) | Fast (within 3 months) |
| Transparency | Low — banks had wide discretion | Medium — formula-based but internal | High — directly linked to repo rate |
| Reset Frequency | No fixed reset | Annual/semi-annual reset | Quarterly reset (minimum) |
| Benefit in Rate Cut Cycle | Least beneficial | Moderate benefit | Most beneficial (fastest pass-through) |
| Current Status | Discontinued for new loans | Existing loans continue; new retail loans moved to EBLR | Mandatory for all new floating-rate retail loans |
Current MCLR Rates of Major Indian Banks (2025)
| Bank | Overnight MCLR | 1-Year MCLR | Home Loan Rate (approx.) |
|---|---|---|---|
| SBI | 8.10% | 8.60% | 8.50% – 9.35% |
| HDFC Bank | 9.00% | 9.20% | 8.75% – 9.45% |
| ICICI Bank | 8.85% | 9.10% | 8.75% – 9.40% |
| Punjab National Bank | 8.10% | 8.65% | 8.45% – 9.50% |
| Bank of Baroda | 8.00% | 8.60% | 8.40% – 10.65% |
| Kotak Mahindra Bank | 8.70% | 9.10% | 8.70% – 9.35% |
| Axis Bank | 8.75% | 9.10% | 8.75% – 9.40% |
| Canara Bank | 8.05% | 8.60% | 8.40% – 10.55% |
Note: Rates are indicative and subject to change. Check your bank's website for current MCLR rates. Home loan rates include MCLR + bank's spread.
How MCLR Affects Your Home Loan EMI
Let's see the practical impact of a 0.25% MCLR change on a typical home loan:
| Loan Details | Before MCLR Cut | After 0.25% MCLR Cut | Savings |
|---|---|---|---|
| Loan Amount | ₹50,00,000 | ₹50,00,000 | — |
| Tenure | 20 years | 20 years | — |
| Interest Rate | 8.75% | 8.50% | 0.25% |
| Monthly EMI | ₹44,274 | ₹43,391 | ₹883/month |
| Total Interest | ₹56,26,000 | ₹54,14,000 | ₹2,12,000 saved |
Key insight: A mere 0.25% cut in MCLR can save you over ₹2 lakh in total interest on a ₹50L home loan over 20 years. This is why tracking MCLR movements matters.
Benefits of MCLR
- Transparent formula — Based on clearly defined components (marginal cost, CRR, operating cost), reducing arbitrary pricing
- Better than Base Rate — More responsive to RBI repo rate changes than the old system
- Predictable resets — Your rate changes only at defined intervals (annually for 1-year MCLR), making EMI planning easier
- Competition-driven — Since all banks publish MCLR, borrowers can compare and negotiate
Limitations of MCLR
- Delayed transmission — Rate changes don't reflect immediately; you wait until your annual reset date (unlike EBLR which resets quarterly)
- Internal benchmark — Banks still have some discretion in calculating components, unlike EBLR which is directly tied to the repo rate
- One-way stickiness — Banks sometimes reduce MCLR slowly when RBI cuts rates but increase it quickly when rates rise
- Superseded by EBLR — Since October 2019, all new retail floating-rate loans must be linked to EBLR, not MCLR
Should You Switch from MCLR to EBLR?
If your existing loan is on MCLR, you can request your bank to switch to EBLR (External Benchmark Lending Rate). Here's when it makes sense:
- Switch if: Your MCLR-linked rate is 0.3%+ higher than the bank's current EBLR-linked rate for similar loans
- Switch if: RBI is in a rate-cutting cycle — EBLR transmits cuts within 3 months vs MCLR's annual reset
- Don't switch if: Your MCLR is already competitive and you have less than 3-4 years remaining on the loan
- Check fees: Some banks charge a switching fee (₹5,000–₹10,000). Calculate whether savings outweigh the fee