What is MCLR?
The MCLR, or marginal cost of funds-based lending rate, is the lowest interest rate at which banks can lend to clients. In 2016, the Reserve Bank of India (RBI) implemented MCLR to determine the interest rates on various forms of loans. It is an internal reference rate used by banks to offer competitive and transparent loan terms. Banks had disbursed MCLR-linked house loans until September 30, 2019.
How MCLR hike will impact borrowers?
Any change in the MCLR will have an immediate impact on loan costs because it implies an increase in the loan interest rate. If the interest rate on the loan rises, EMIs will rise automatically until the bank cuts its mark-ups/margins on loans. Borrowers must now pay more to pay EMIs on loans tied to the MCLR.
When the loan reset date is set for existing borrowers, the increase in MCLR will affect their EMIs. Typically, MCLR-based loans have a duration of six months or a year. Typically, banks use the current MCLR rate to determine the future EMIs on the reset date. Please be aware that the upcoming EMIs (until the next reset date) are determined by the effective interest rate (MCLR rate plus margin effective), the outstanding loan balance, and the remaining loan term.