Starting April 1 this year, all new floating rate loans moved to MCLR regime. MCLR stands for Marginal Cost of Funds based Lending Rate. Under MCLR regime, the lending rate is linked to borrowing cost (deposit rates) of the banks.
Till March this year, floating rate loans were linked to base rate. Under base rate regime, banks could exercise a lot of discretion in setting lending rate. Not anymore.
All floating rate loans sanctioned after March 31, 2016 will be offered at MCLR + Spread. Existing home loan borrowers (before March 31, 2016) may also be offered an option by respective banks to switch from base rate to MCLR.
In this post, I will discuss a few aspects about MCLR that you must be aware of.
1. MCLR is certainly more transparent than Base Rate.
Under MCLR, the interest (lending) rate is linked to the incremental borrowing cost of the bank.
Hence, the banks may not be able to exercise discretion as in case of base rate.
If a bank can raise funds (accept deposits) at a lower cost, then MCLR will be automatically revised downwards.
For more on how MCLR is calculated, please go through the following post.
Must Read: MCLR Decoded
2. Your loan interest rate will be MCLR + Spread
MCLR is not the only thing you need to focus on. There is an associated spread too. The spread is typically a function of your risk profile i.e. your ability to repay the loan.
3. MCLR is not linked to Repo Rate
MCLR is not linked to Repo rate announced by the Reserve Bank of India. It is linked to the incremental borrowing cost of the bank.
Hence, there is no need to rejoice when RBI cuts repo rates. It may not lead to revision in your home loan interest rate.
Your home loan MCLR is not linked to the repo rate. Of course, you can expect borrowing cost of the banks to come down if the RBI were to cut repo rates. Lower borrowing cost will lead to lower MCLR for your loan.
4. Which loans will be linked to MCLR?
All floating rates loans will be linked to MCLR. Fixed rate loans with tenor of greater than 3 years will not linked to MCLR. Hence, banks retain the pricing power when it comes to fixed rate loans.
Typically personal loans and car loans are fixed rate loans and won’t fall under MCLR regime.
5. MCLR is a double edged sword
Just like MCLR will enable swift transmission of interest rates when the interest rates are going down, it will also lead to quick transmission when the interest rates are rising.
Both rate cuts and rate hikes will be transferred quickly to the borrowers.
Hence, it can be a double edged sword.
However, banks are typically quite swift in passing on the increase in interest rates. I wouldn’t take this aspect negative for MCLR linked loans.
6. You may have to wait before your MCLR is revised
MCLR linked loan also have an interest reset period. The loan agreement will define how frequently your MCLR will be revised. Banks have to compulsorily announce at least 5 MCLRs (overnight, 1-month, 3-month, 6-month, 1-year). Banks have discretion to announce MCLR of higher maturity too.
Different types of loans will be linked to different MCLRs.
For instance, a few banks such as Kotak Mahindra have linked home loans to 6-month MCLR while others such as SBI and ICICI have linked home loans to 1-year MCLR.
Even though MCLR will be reviewed (and revised, if required) every month by the bank, your loan interest rate will be revised only at the next interest reset date (as per your loan agreement).
For instance, if your home loan is linked to 1-year MCLR, the interest reset dates for your loan will be a year apart. For instance, May 1, 2016, May 1, 2017 and so on.
Even if 1-year MCLR gets revised in September, 2016, your home loan interest rate will not be revised till May 1, 2017. You will have to wait.
Had your home loan been linked to Base rate, the home loan interest rate would have been revised as soon as the base rate was changed.
7. Your existing home loans will continue to be linked to Base rate
If you took home loan before March 31, 2016, your home loan would have been linked to base rate.
Your existing base rate linked home loan will not automatically be converted into a MCLR linked loan.
You have to request your bank to convert the loan to MCLR. Your bank may permit it at a cost/fee.
Do note new borrowers do not have option to go for a base rate linked loan.
8. Whether you should switch from Base Rate to MCLR?
Depends on the switching cost. There might be additional administration and documentation charges. You are advised to check all the charges with the bank before deciding to make the switch.
MCLR is clearly more transparent. For me, MCLR is a winner over base rate for the same reason.
However, do remember MCLR can be a double edged sword. Rate hikes will be passed as swiftly as rate cuts. Moreover, consider the impact of interest reset periods before deciding to switch. And yes, you won’t be allowed to switch back to base rate.
For home loan borrowers, switching loan to a different bank is always an option.
26 thoughts on “8 things to know about MCLR”
There is a 9th thing to know about MCLR.
Banks fix the final lending rate in the MCLR method same as the Base rate method. What is the difference between current MCLR lending rates and base rates today? Hardly 0.1%?
When they reduce MCLR, they increase the spread accordingly, keeping the final rate same and close to current base rates. Recently ICICI bank did that, they reduced .05% on MCLR and increased by the same percent in the spread. We all know having higher spread will pinch us more when interest rates start going up.
We can clearly see banks preparing for a future bonanza now itself by putting higher spread on the interest rates for loans offered now.
Nobody can stop these atrocities in our system, hence people like Rajan are moving out of the system knowing full well that it is not possible to reform our system.
You mean they decreased MCLR and increased MCLR spread for the existing loans?
Can you please point to the source (web link)?
As In understand, increasing spread is not as easy.
Check out the MCLR until May.
Both SBI and ICICI had MCLR at 9.20% and spread over it is .25%
Read this piece.
http://profit.ndtv.com/news/your-money/article-sbi-cuts-home-loan-interest-rate-effective-april-1-1339949
While SBI further reduced their MCLR to 0.15% in May keeping spread at .25% (Final rate 9.4%), ICICI reduced MCLR to 9.15% in June and increased spread to 0.3% effectively keeping their lending rate same at 9.45%
http://www.icicibank.com/Personal-Banking/loans/home-loan/home-loan-interest-rates.page?#toptitle
What do you call this fraud?
Sir,
I have a home loan . Loan sanction November 2015 2200000+450000 for 18 Years I paid Rate of interest 9.55% and 9.40% . I want to changes home loan in MCLR .
I can say that How much money paid MCLR fee and How much benefit of EMI Per months. Do EMI less per months. What is the decorum of MCLR ? Please sent me guide line . Thanks
Dear Rajkumar,
Suggest you go through following post.
http://www.personalfinanceplan.in/opinion/decoding-mclr-should-you-switch-from-base-rate-to-mclr/
Once Spread(Markup – Margin) is set at the time of Disbursement. Its not possible to change the spread(Markup – Margin) of ongoing/Live loans. Where as for New Lendings Bank can / Bank has right to increase or decrease the spread(Markup – Margin).
In your case you check whether ICICI has increased the spread(Markup – Margin) on live loan after disbursement if it has been on live loan, you can write to the customer care or the respected authorities and bring to their notice.
Thanks for your inputs, Jeetendra.
Both SBI and ICICI had MCLR and Spread same in April (9.2%+0.25%) and the final rate was 9.45% for a male salaried borrower.
http://profit.ndtv.com/news/your-money/article-sbi-cuts-home-loan-interest-rate-effective-april-1-1339949
In May SBI brought down MCLR to 9,15% with spread 0.25% remaining as is. Final Rate 9.4%
In June ICICI brought down MCLR to 9.15% but the spread is increased to 0.3% effectively the final rate still remains at 9.45%.
http://www.icicibank.com/Personal-Banking/loans/home-loan/home-loan-interest-rates.page?#toptitle
If ICICI Bank the decreased MCLR and increased spread for the same type of borrower, it is quite shameless.
The article you shared makes no mention of the effective interest rate for male salaried borrower in April.
Currently, the spread for male salaried employee is 30 bps. I don’t know what it was before.
ICICI Bank has certainly not changed interest rate for women borrowers.
Can you please recheck?
The snippet from the NDTV article I shared in the previous post is quoted below. The first para gives info on SBI’s rates in April. Last para says ICICI has the same rates as SBI, both MCLR and spread. And the values mentioned are 9.2% and 0.25%.
What is the current spread at ICICI? 0.3%
I did see those values in April in their site, but unfortunately it is not accessible anymore.
“SBI in a statement on Thursday said that it has fixed its home loan interest rate at 9.45 per cent, which is 0.25 percentage point more than its one-year marginal cost of fund-based lending rate of 9.20 per cent.
However, women borrower would get the loan 0.20 percentage point above the MCLR at 9.40 per cent, it said. The new rate is applicable from April 1, it said.
As per the information available on SBI website, the earlier home loan rate 9.5 per cent for women borrowers and 9.55 per cent for others.
As per ICICI’s website, the private lender’s minimum home loan rates are also at par with its bigger rival SBI as both the 1-year MCLR and the spread over it are same.”
In case of women borrower, if you read the NDTV article, it says SBI’s MCLR is 9.2% and spread is 0.2% in April. Effective rate is9.4$
It also mentions ICICI is at par with SBI on this (minimum home loan rate).
If you check current ICICI rates for women borrower, its 9.15% + 0.25%. Effective rate is 9.4%
The spread in this case went from 0.2% to 0.25% while MCLR dropped by 0.05%.
I get your point.
Just that, for me, it is not conclusive enough.
Don’t worry, you will see it for yourself how it works in the coming days. They will do the same again and you will get a conclusive proof.
Just keep track of the current rates, if you can.
Pradeep,
Sure. I will keep track in the future.
Thanks for pointing out.
I always expected banks to find a way out of this. Just that I never expected them to be so blatant.
This is precisely why RBI governor announced a review of MCLR implementation by banks.
I mean higher spreads is really bad for customers coming in. If and when MCLR goes up to 10% or 11%, they will have to pay substantially more. Banks are doing it the HFC way. HFCs play with both BPLR and spreads to their benefit for new and old customers in rising and falling rate scenarios.
Now banks have learnt the trade.
Now the need of the hour is a cap on Spread, provided MCLR is calculated as per RBI formula.
Hi Deepesh,
Check out this month’s lending rates from ICICI. Their MCLR has gone down to 9.1% but spread increased to 0.35% keeping final rate constant at 9.45%.
http://www.icicibank.com/Personal-Banking/loans/home-loan/home-loan-interest-rates.page?#toptitle
You have live proof now of whatI was talking about.
Hi Pradeep,
You are right. This is a good enough proof.
I didn’t expect them to be so blatant.
But certainly expected ICICI Bank to be at forefront if such a thing were to happen.
Thanks for pointing out.
With rates being abused so rampant with MCLR. I better hold back my idea of changing over from Base Rate. I at least can rest assured my margin stay put!
Suggest you go through this post.
http://www.personalfinanceplan.in/opinion/banks-may-not-be-passing-mclr-cuts-to-new-home-loan-borrowers/
Agreed, I would not like to find myself he ‘high spread’ scenario.
I would add some words to your statement “it would be better to switch when the spread is lower than your existing spread over Base Rate”
Hey Deepesh,
A doubt which cropped up after today’s monetary policy release – Now with MCLR in the picture and rate cuts if any reflected in the same. How would the age old Base rates (of the banks) would be treated, since no loans are offered on this rate anymore?
So as mandated, every month banks are releasing their effective 1 year/6 months MCLR’s since April ’16. And for that matter they have dropped!However, haven’t seen any such drop in the Base Rate (for eg. I-Base for ICICI).
Does this translate, ICICI will not worry to effect any change in I-Base since this rate cease to exist?
Hi Prasad,
Banks will keep revising base rate too. Just that base rate is based on overall cost while MCLR is based on marginal cost of funds.
Hence, MCLR revisions will be more frequent.
Point to note is that while revision in base rate changes your interest rate straightaway.
Revision in MCLR may not lead to change in your interest rate right away. It will happen only on interest reset date.
Hi Deepesh, I took a home loan from SBI in first week of December 2015 at 9.25 ( MCLR 8.90 and spread 0.30 ) , the MCLR within a month has now reduced by around 100 basis points as of today (after today’s reduction news of 90 basis points) . A 100 basis points reduction causes significant interest outgo difference given my loan account. Now that my interest reset is set at 1 year Can i still ask bank to reset my interest rate be it at some fee and are there incidents of banks resetting it ?
Hi Param,
Your interest rate (applicable MCLR) will remain same for 1-year. That is one flip side of MCLR.
Even though i-year MCLR has been cut sharply, your MCLR wll remain the same for 1 year.
I do not think you can change it. However, do check with your bank. There might be a way out.
Hi Deepesh, I took a Home Loan from SBI on a Base rate of 9.55% p.a. Now the MCLR rate which Bank is offering is 8.80% p.a. for one year. But what Bank is suggesting that after one year if for Exa. RBI Loan interest rate goes for 9.10%p.a. my spread .80% of MCLR will not change and it will be considered as 9.80%p.a. Please suggest your view.
Yes, spread will likely stay constant during the course of your loan.