RBI Guidelines on MCLR 2018

<strong>RBI</strong> <strong>Guidelines</strong> on MCLR 2018
There is a lot of buzz in the news that the <strong>RBI</strong> has instructed all the banks to
synchronise Base rate with MCLR by April 2018. It means all the home loan
borrowers including pre-2016 borrower’s loan will be transferred to MCLR rate
from the base interest rate.
Let’s first understand what is an MCLR. MCLR full form is- Marginal Cost of
Lending Rate. The name itself suggests that the rate of lending is marginal and
below that rate banks are not allowed to lend to any customer. The MCLR is
basically a way of calculating the interest rate which will be imposed on a
customer. MCLR is an internal benchmark for a bank. The MCLR of any bank is
calculated on the basis of Marginal Cost of Fund, the Cash Reserve Ratio (CRR),
lenders’ operational costs, and tenure premium (which is an extra charge that
Banks charge for long tenure loans). This method has been created by <strong>RBI</strong> and it is
mandatory for all banks to use MCLR for loans given after 1st April 2016.

Recent announcement made on MCLR
The latest announcement on MCLR which has become a burning topic among the
financial experts, as well as the home loan borrowers, is the <strong>RBI</strong>s announcement of
linking all existing base rate home loans to MCLR with effect from 1st April 2018.
It means that after two years of introducing MCLR, now it has become mandatory.
The announcement was made on Wednesday ( 7th Feb 2018) and the objective of
this change is to improve monetary policy transmission. The deputy governor of
the <strong>RBI</strong> N S Vishwanathan reported that the base rate and the MCLR will be
“harmonized and not equalized”.
A base rate on a home loan is reviewed quarterly whereas an MCLR is reviewed
monthly. Both of these two rates have different ways of fixing it. Once the linking
of the base rate and MCLR is done, it is likely that base rate will be reviewed on a
monthly basis as well.
The interest rate on a credit was previously determined by the base rate. If there is
a rate increase by <strong>RBI</strong> then bank used to increase the interest rate promptly, but
when the rate of <strong>RBI</strong> falls down banks slow down the process of bringing the
interest rate down.
In the January 2017, the MCLR of almost all the banks were reduced by 80-90
basis points because of a low repo rate. A basis point is a one-hundredth of one
percentage point. But the base rate remained unchanged for many banks. It directly
meant that banks were getting fund from <strong>RBI</strong> at a low cost but the same money
was disbursed to the general public at a high cost. Bank earned a high benefit in an
unjustified manner. But the application of MCLR ensures that the banks regularly
revise the interest rate along with any change in <strong>RBI</strong> rates. So the ultimate
beneficiary by implementing MCLR is the borrower himself.

A home loan interest rate is calculated by MCLR (or Base Rate) + Spread. Let’s
say the MCLR is 9% then the interest rate will be 9%+ 0.25%( spread) = 9.25%. It
was seen that banks would initially provide a low spread rate to attract the
customers and after some time the spread is increased which directly affects the
customers. After implementation of MCLR banks are not allowed to change the
spread unless there is a change in customer’s credit.
Under the MCLR process, banks have to publish their MCLR rate at least five
times in a month. The declaration should be done overnight, one month, three
months, six months, one year, two years, and three years rates each month.
However, when it comes to lending on an MCLR basis, the interest rate of the
home loan gets re-priced on a periodical basis.
Now <strong>RBI</strong> has made it necessary to allow base rate borrowers to switch to MCLR.
One can switch to MCLR with the same lender or the other option is to go for a
refinance. With a refinance, a borrower can switch to the lender who is providing
loans at MCLR. Switching from lender to lender or changing the mode of interest
can be a chargeable one. Banks may impose transfer charges to a borrower while
applying for a transfer. So if one’s home loan is near to end or only a few
installments are remaining then one can still continue to be in base rate itself.