What Is MCLR Rate?

If you took a home loan between April 2016 and October 2019, your loan is almost certainly linked to the MCLR — Marginal Cost of Funds Based Lending Rate. Despite being gradually superseded by repo-linked rates, MCLR still governs an enormous stock of outstanding loans across India. Understanding it is not just academic — it directly affects your EMI and your decision to refinance.

A Brief History of Bank Lending Rates in India

India's banking system has cycled through several interest rate frameworks:

• PLR (Prime Lending Rate): Pre-2010, opaque and prone to manipulation
• Base Rate: 2010–2016, calculated on average cost of funds; also criticised for slow transmission
• MCLR: April 2016 onwards, based on marginal (incremental) cost of funds — a significant improvement
• RLLR/EBLR (External Benchmark Lending Rate): October 2019 onwards — now the standard for all new floating-rate retail loans

How MCLR Is Calculated

Banks calculate MCLR as the sum of four components:

Banks must publish MCLR for tenors of overnight, 1 month, 3 months, 6 months, and 1 year. The 1-year MCLR is most commonly used for home loans.

As of June 2026, major banks' 1-year MCLR:

Your actual loan rate = MCLR + Spread (a fixed margin set at origination, typically 0.25–1.50%).

Why MCLR Transmission Is Slower Than Repo Rate

MCLR is based on the bank's marginal cost of deposits — the rate at which the bank is raising new deposits today. This is influenced by the repo rate but also by:

• Competition among banks for deposits
• Existing high-cost deposits that haven't matured yet
• Liquidity conditions in the banking system

When RBI cuts the repo rate, banks' marginal deposit cost falls slowly as old high-rate deposits roll over and are replaced with cheaper new ones. This is why MCLR takes 6–12 months to fully reflect a repo rate cut.

In contrast, RLLR (External Benchmark Rate) is directly linked to the repo rate — no such lag exists.

The Reset Frequency Problem

MCLR resets are typically annual for home loans. This means even after your bank revises its MCLR (say, every month), your loan rate only changes on your anniversary reset date. If RBI cuts rates in October and your reset date is in June, you wait 8 months for any benefit.

RLLR/EBLR loans reset quarterly — you get benefits faster.

MCLR vs RLLR: The Key Differences

Should You Switch from MCLR to RLLR?

This is the most practical question. Here is a framework:

Switch if:

• Your current MCLR-based rate is ≥ 0.40% higher than the equivalent RLLR-based rate your bank offers
• You have ≥ 10 years remaining on your loan (the interest saving compounds over time)
• You expect rates to fall further (rate-cut cycle ongoing)

Don't switch if:

• The switching fee exceeds 2–3 years of interest savings
• Your outstanding principal is small (< ₹10–15 lakh)
• You plan to foreclose within 2–3 years

Example: Vikram has ₹35 lakh outstanding, 12 years remaining. His MCLR rate is 9.35%. SBI's current RLLR rate for him would be 8.90%. Switching saves 0.45% × ₹35 lakh = ₹15,750/year in interest. SBI's switching fee is ₹5,000 + GST = ~₹5,900. Payback period: less than 5 months. This is a clear switch case.

How to Switch Your Loan Benchmark

1. Submit a written request to your home branch or via net banking.
2. The bank may ask you to sign a revised loan agreement.
3. Fees range from ₹3,000 to ₹10,000 depending on the bank.
4. Your new rate takes effect from the next reset date or immediately (varies by bank).

Some banks allow balance transfer to a different bank as an alternative — which also gives you a chance to renegotiate the spread.

MCLR for Non-Retail Loans

Corporate and MSME loans may still be offered on MCLR (the external benchmark mandate was specific to floating-rate retail and MSME loans). Large corporations may even have loans linked to the older Base Rate or custom benchmarks.

These figures are estimates for educational purposes. Consult a SEBI-registered advisor for personalised advice.