What is MCLR? Meaning, Full Form & How It Affects Your Personal Loan Rate 

MCLR is an internal benchmark that banks use to determine the interest rate on certain floating-rate loans. Understanding what MCLR is can help you see why borrowing costs differ between banks and why the interest rate on some loans changes over time.  

Although MCLR remains relevant for many existing bank loans, most new floating-rate retail loans from banks now follow an external benchmark such as the Repo-Linked Lending Rate (RLLR). It is also important to note that MCLR does not apply to loans offered by NBFCs. 

MCLR full form and meaning 

The full form of MCLR is Marginal Cost of Funds-based Lending Rate. The Reserve Bank of India (RBI) introduced the MCLR framework in April 2016 to replace the Base Rate system and improve the transmission of changes in policy rates to borrowers. 

If you are wondering what the MCLR rate is, it is the internal benchmark lending rate that banks use to price eligible floating-rate loans. Banks add a spread based on factors such as the borrower’s credit profile, loan amount and repayment tenure to arrive at the final lending rate.  

In simple terms, MCLR refers to a bank’s lending benchmark that reflects the cost of raising fresh funds. This is why MCLR differs from one bank to another and can change as funding costs change 

How is MCLR calculated? 

Banks calculate MCLR using four key components: the marginal cost of funds, the negative carry on account of the Cash Reserve Ratio (CRR), operating costs and a tenor premium for longer-duration loans. Since funding costs change over time, banks review and publish their MCLR for different tenures every month.  

How MCLR affects your loan interest rate 

The interest rate on an MCLR-linked loan is reviewed only on the reset date mentioned in your loan agreement, which is commonly every six or twelve months. Until that reset date arrives, changes in the published MCLR usually do not affect your existing interest rate. 

For example, if a bank’s one-year MCLR stands at 8.75%, and it adds a spread of 0.50% for a particular borrower, the effective lending rate works out to 9.25%. This rate does not stay fixed for the entire loan tenure. It resets at intervals defined in your loan agreement, known as the loan reset date, which is usually every six or twelve months. 

Types of MCLR by tenure 

Banks publish several types of MCLR rates, one for each tenure, and the one applied to your loan depends on the reset period your lender uses. 

MCLR vs Repo-Linked Lending Rate (RLLR): what changed in 2019 

From 1 October 2019, the RBI required banks to link new floating-rate retail loans, including home and personal loans, to an external benchmark instead of MCLR. The Repo-Linked Lending Rate (RLLR), which is directly linked to the RBI’s repo rate, became the most widely adopted benchmark. 

This change was introduced to improve the transmission of RBI policy rate changes to borrowers. Unlike MCLR, which depends on each bank’s internal funding costs, RLLR tracks changes in the repo rate, allowing interest rate revisions to reflect monetary policy more quickly. 

To understand how RBI policy decisions influence borrowing costs, you can also read our guide on the impact of the repo rate on personal loans. 

Does MCLR apply to FatakPay personal loans? 

MCLR is a bank-specific benchmark defined under the RBI’s regulatory framework for banks, and it does not extend to non-banking financial companies (NBFCs). 

FatakPay, as an NBFC, follows its own NBFC lending rate structure rather than a monthly-reviewed banking benchmark like MCLR or RLLR. Your personal loan interest rate through FatakPay is determined by risk-based pricing, considering factors like your credit profile, income stability and repayment history, rather than a bank’s cost of funds calculation. 

MCLR vs base rate 

Before MCLR existed, banks priced loans using the base rate system, and the two work quite differently, like: 

• Base rate relied on the average cost of funds, while MCLR uses the marginal, or incremental, cost of the latest funds raised. 

• Base rate revisions were less frequent and less responsive to RBI rate cuts, while MCLR is reviewed monthly. 

• MCLR includes a tenor premium tied to loan duration, a feature that the base rate did not factor in. 

• Base rate has been phased out for most new loans since April 2016, though some older loans may still reference it. 

Get a Personal Loan with Transparent Interest Rates  

Understanding MCLR is useful when comparing floating-rate loans offered by banks. If you are considering a personal loan from an NBFC, review the personal loan interest rates and charges, estimate your repayments using the personal loan EMI calculator, and compare the overall loan terms before applying. FatakPay offers eligible borrowers personal loans of up to ₹5 lakh through a fully digital application process with transparent terms.  

Conclusion 

Understanding MCLR can help you make better sense of how banks decide interest rates on certain loans. However, it is equally important to remember that not every lender follows this system. Personal loans from NBFCs are priced using their own lending policies and borrower assessment, so changes in MCLR do not directly affect them. 

Before applying for any personal loan, compare the final interest rate, EMI, repayment tenure and other charges instead of focusing only on the benchmark used. If you are looking to reduce your borrowing costs on an existing loan, it is also worth understanding loan restructuring vs refinancing before making a decision. A quick check with FatakPay’s personal loan EMI calculator can also give you a clearer idea of what your monthly repayments may look like before you borrow.  

FAQs 

How often does MCLR change? 

Banks review and publish MCLR figures every month for each tenure, though the rate applied to your existing loan only resets on your specific loan reset date, typically every six or twelve months, not every time the published MCLR changes. 

Does MCLR apply to personal loans from NBFCs like FatakPay? 

No. MCLR is a regulatory requirement for banks only. Personal loans from NBFCs, including FatakPay, are priced using the lender’s own risk-based model rather than a bank benchmark. 

What replaced the MCLR system for retail loans in 2019? 

The RBI mandated external benchmark-linked lending rates, most commonly the Repo-Linked Lending Rate (RLLR), for all new floating-rate retail loans from banks effective 1 October 2019, replacing MCLR as the default benchmark for these loans. 

Is a lower MCLR always better for borrowers? 

Not necessarily. A lower MCLR generally means a lower starting interest rate, but the spread a bank adds on top, along with your loan reset date and tenure, also affects your final EMI, so comparing the full rate structure matters more than the MCLR figure alone. 

What is the difference between MCLR and repo rate? 

MCLR is an internal, bank-calculated benchmark based on funding costs and operating expenses, while the repo rate is the rate at which the RBI lends to commercial banks, set through RBI monetary policy decisions. RLLR-linked loans track the repo rate directly, while MCLR-linked loans respond to it indirectly and with a lag. 

Can my MCLR-linked loan rate increase during the tenure? 

Yes. If your bank’s MCLR rises before your loan reset date, your interest rate and EMI can increase once the reset takes effect, since MCLR-linked loans are variable by design rather than fixed for the full tenure.