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MCLR: meaning, components and difference from EBLR
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MCLR stands for Marginal Cost of Funds based Lending Rate. It is an internal benchmark that each bank calculates for itself, and it works as the minimum rate below which the bank is not allowed to lend (with a few exceptions). The RBI introduced it on 1 April 2016, replacing the Base Rate, which in turn replaced the Benchmark Prime Lending Rate (BPLR).
What goes into the MCLR
A bank's MCLR is built from four components:
- Marginal cost of funds: what the bank pays on new deposits and borrowings, with greater weight on deposits.
- Negative carry on CRR: the cost of holding cash reserve ratio balances that earn nothing.
- Operating costs: the cost of running the bank.
- Tenor premium: extra charge for longer loan periods.
Banks publish MCLR for several tenors, from overnight to one year.
How the loan rate works
Loan rate = MCLR + spread. The spread covers the bank's margin and the borrower's credit risk. The loan's rate is reset at a fixed interval, such as yearly for a loan linked to the one-year MCLR, so a change in MCLR reaches the borrower only at the next reset date. That is the main complaint about MCLR: transmission of a repo rate cut can be slow.
MCLR vs EBLR
| Point | MCLR | EBLR |
|---|---|---|
| Set by | Each bank, internally | An external benchmark such as repo |
| Transmission | Slower, at reset | Faster, at least every three months |
| New retail and MSME floating loans | No, since October 2019 | Yes |
| Existing borrowers | Many older loans still linked | Can switch to EBLR |
Since 1 October 2019, new floating-rate personal, retail and MSME loans have had to be linked to an external benchmark, see EBLR. MCLR still applies to older loans, and banks may use it for other categories such as loans to large corporates.
How bank exams ask about it
Stems include "MCLR was introduced in", "MCLR replaced", "the minimum rate at which banks can lend", and a list of components. Expect a question on the sequence BPLR, Base Rate, MCLR, EBLR. The cost-of-funds link is explained under CASA ratio. Keep it in your banking awareness notes.
Where to find a bank's MCLR
Each bank publishes its MCLR table on its website. The RBI does not publish a single figure.
Frequently asked questions
Does a fall in repo rate lower my MCLR loan EMI immediately?
No. The change is passed on only at the next reset date, and banks may not cut MCLR by the full amount.
Can I move from an MCLR loan to an EBLR loan?
Yes, banks offer a switch on request. Ask for the current terms.
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- EBLREBLR links loan rates to an external benchmark such as the repo rate. Meaning, benchmark options, spread, reset rules and difference from MCLR with example.
- Repo rateRepo rate is the rate at which the RBI lends short-term money to banks against government securities. How it works, what a change does and how exams ask it.
- CASA ratioCASA ratio is the share of current and savings account deposits in a bank's total deposits. Meaning, formula, example and why a higher CASA lowers funding cost.
- Cash reserve ratioCRR is the share of deposits that banks must keep with the RBI in cash. Meaning, legal basis, worked example, how it controls money supply and exam questions.
- Non-performing assetsAn NPA is a loan overdue for more than 90 days. Meaning, SMA stages, substandard, doubtful and loss assets, gross vs net NPA and how banks recover.
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