For anyone taking out a loan in India, particularly a home loan or a business loan, the term MCLR is a crucial part of the lending landscape. MCLR, or the Marginal Cost of Funds based Lending Rate, is an internal benchmark interest rate set by the Reserve Bank of India (RBI) that banks must adhere to. Since its introduction in April 2016, MCLR has become the standard for calculating floating-rate loans.
As of August 2025, major Indian banks have their 1-year MCLR rates ranging from 8.60% to 8.80%. This guide will explain what MCLR means, how it's calculated, and its impact on your loan.
What is MCLR?
MCLR means the Marginal Cost of Funds based Lending Rate. It is essentially the minimum interest rate a bank can charge its customers for a loan. The system replaced the Base Rate framework to ensure a more dynamic and market-sensitive lending environment.
Under the MCLR system, a bank's lending rates are directly tied to its incremental cost of borrowing. This means if a bank's cost of funds decreases, it is compelled to pass on this benefit to the borrower, unlike the previous system, where banks often delayed such rate cuts.
How is MCLR Calculated?
The MCLR rate is a dynamic figure that banks must revise monthly. Its calculation involves four key components:
1. Marginal Cost of Funds (92%): This is the primary component and represents the average interest rate a bank pays on its various sources of funding, such as savings accounts, term deposits, and borrowings from the RBI. The "marginal" aspect means it considers the cost of new funds, not the average cost of all existing funds.
2. Negative Carry on Cash Reserve Ratio (CRR): Banks are mandated to maintain a certain percentage of their deposits as CRR with the RBI, on which they do not earn any interest. The cost incurred for holding these non-remunerative funds is known as the "negative carry on CRR" and is factored into the MCLR.
3. Operating Costs: This includes all the daily expenses a bank incurs to run its lending operations, such as salaries, rent, and administrative costs.
4. Tenure Premium: An additional charge is added for loans with a longer tenure to account for the increased risk over a longer period. For example, a 15-year home loan will have a higher premium than a 5-year loan.
The final interest rate for a borrower is determined by adding a spread (the bank's profit margin) to the MCLR. This explains the ‘what is MCLR in loan’ part of the calculation.
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Confused About What MCLR+0.75% Really Means? You’re Not Alone
For many borrowers, banking terms like MCLR can feel confusing, especially when linked with extra percentages. One of the most common queries around this is: what does “1-year MCLR + 0.75%” mean?
A user on Reddit asked:
“What is one year MCLR+0.75% mean?”
Insight: This reflects a widespread doubt among borrowers. The “1-year MCLR” is the benchmark lending rate set by a bank for a 1-year tenure. The +0.75% indicates the spread or margin added by the bank. So, if the 1-year MCLR is 8.5%, your effective loan interest rate becomes 9.25% (8.5% + 0.75%).
What do we infer from this case?
1. The final loan interest rate = MCLR + Bank’s Spread.
2. Each bank sets its own spread based on credit profile, loan type, and risk factors.
3. Even if RBI cuts repo rates, your EMI may only change after the MCLR reset period (commonly 6 or 12 months).
Tip: Always check your bank’s latest MCLR rates and ask about the spread before signing a loan agreement. That way, you know your real cost of borrowing, not just the benchmark rate.
Base Rate vs. MCLR
The Base Rate vs MCLR debate highlights the RBI's efforts to create a more efficient and transparent lending system. The Base Rate, which was in effect from 2010 to 2016, was based on the average cost of funds, which made it sluggish and less responsive to changes in the repo rate.
For example, A 2023 study on monetary policy transmission in India found that a 100-basis-point increase in the policy rate led to an increase of 26-47 basis points in the weighted average lending rate under the MCLR regime, compared to only 11-19 basis points under the Base Rate regime. This significant difference demonstrates the improved effectiveness of MCLR in transmitting policy changes to bank lending rates
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MCLR vs. RLLR
In October 2019, the RBI introduced a new external benchmark system, the Repo Linked Lending Rate (RLLR), for certain loans. The key distinction is that while MCLR is an internal benchmark that still allows for some bank discretion, RLLR is directly linked to the RBI's repo rate, an external benchmark. This means any change in the repo rate is instantly reflected in RLLR-linked loan rates. This move was made to further improve the speed and transparency of monetary policy transmission.
For borrowers who prioritise stability in their EMIs, MCLR-linked loans might be a better choice, as their rates only reset after a specific period, typically 6-12 months. This is the core of the MCLR vs RLLR comparison.
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Why Was MCLR Introduced?
The Reserve Bank of India introduced MCLR to address key issues with the previous Base Rate system. Here are the main reasons:
1. Weak Monetary Policy Transmission: Under the Base Rate system, banks were often slow to pass on the benefits of RBI rate cuts to borrowers. Despite significant cuts in the repo rate, lending rates remained high, weakening the impact of the central bank's policy. MCLR was designed to create a more direct and faster link between policy rates and lending rates.
2. Lack of Transparency: The Base Rate calculation was opaque, making it difficult for borrowers to understand how their interest rates were determined. The MCLR framework mandated that banks publish their rates for different tenures, bringing greater clarity and transparency to the lending process.
3. Discretionary Lending: The Base Rate system allowed banks significant discretion in setting their lending rates, leading to inconsistencies and a lack of a uniform benchmark. By linking rates to the marginal cost of funds, the RBI aimed to create a more standardised and fair lending environment across the banking sector.
Limitations of MCLR
Despite its advantages, the MCLR system also has certain limitations, which led to the introduction of the Repo Linked Lending Rate (RLLR).
1. Delayed Transmission of Rate Cuts: While MCLR is more responsive than the Base Rate, it still operates with a lag. Your loan rate is reset based on the MCLR at a specific interval, which is typically 6 to 12 months. This means if the RBI cuts the repo rate, you may not see the benefit of lower EMIs for several months until your next reset date.
2. Internal Benchmark: MCLR is an internal benchmark set by the bank. This means that while it is based on a prescribed formula, the bank still has some discretion in determining certain components and the final spread. This can sometimes result in a lack of complete uniformity across all banks.
3. Not Applicable to All Loans: Not all loans are linked to MCLR. Fixed-rate loans and certain other categories, like loans to bank employees and special government schemes, are exempt, which can create different lending rate structures within the same bank.
Understanding the various lending benchmarks like MCLR, Base Rate, and RLLR is crucial for anyone with a floating-rate loan. While the MCLR framework has significantly improved the efficiency and transparency of India's lending system compared to the old Base Rate, it is still an internal benchmark that operates with a time lag.
For new borrowers, the RLLR framework, with its direct link to the RBI's repo rate, offers the quickest monetary policy transmission, though it comes with more volatile EMI payments.
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