MCLR (Marginal Cost of Funds Based Lending Rate) – Meaning and Impact on Home Loans 2026

The Marginal Cost of Funds-Based Lending Rate (MCLR) is an internal lending benchmark set by banks based on their cost of funds and other prescribed components. Unlike the Reserve Bank of India’s repo rate, MCLR can differ across banks and loan tenures. For borrowers, the applicable MCLR, loan spread and reset date influence when changes in the benchmark may affect the interest rate and EMI.

• MCLR is calculated using four components, marginal cost of funds, negative carry on cash reserve ratio, operating costs and tenure premium.
• MCLR is published for different tenures, including overnight, one month, three months, six months and one year.
• The impact of an MCLR change on a loan depends on its applicable benchmark, spread and reset frequency.

Before making a borrowing decision, check your lender’s applicable MCLR, spread and next reset date. These details help you understand when a benchmark change may affect your repayments.

MCLR stands for Marginal Cost of Funds Based Lending Rate. MCLR is a bank-specific benchmark used to determine interest rates on certain loans. Its calculation considers the marginal cost of funds, operating costs and other prescribed components. This explains the meaning of MCLR and why rates can differ across banks and loan tenures.

The Reserve Bank of India (RBI) introduced MCLR effective 1 April 2016, replacing the Base Rate system to improve the transmission of policy rate changes to lending rates. The framework was set out in the RBI circular dated 17 December 2015. Bajaj Finance customers should check the applicable loan agreement to understand the benchmark, spread and reset terms governing their interest rate.

When the MCLR changes, the interest rate on loans linked to it changes correspondingly — meaning your EMI amount will increase or decrease depending on the direction of the MCLR movement. A lower MCLR generally leads to lower interest rates and, consequently, lower EMIs for borrowers, while a higher MCLR results in the opposite effect.

Note that MCLR is not the only factor determining your final home loan interest rate, your credit score and loan tenure also play a significant role in the final home loan interest rate you're offered.

Banks announce various MCLR rates depending on loan tenure, ensuring flexibility for different borrowing needs:

• Overnight MCLR: Used for very short-term loans, typically lasting just a day
• 1-month MCLR: Applied to short-term credit facilities needing quick repayment
• 3-month MCLR: Common for working capital loans and short-term personal borrowing
• 6-month MCLR: Often associated with small business loans or moderate-duration personal loans
• 1-year MCLR: The most popular benchmark for home loans and other long-term retail lending products
• 2-year and 3-year MCLR: Less frequently offered but suitable for longer loan periods

The MCLR linked to your loan determines how often your interest rate changes. For example, if your loan is tied to the 1-year MCLR, the rate is reviewed and potentially reset every year based on the bank's latest MCLR revision, meaning your EMI could remain stable for a full year even if the bank's MCLR shifts mid-cycle, only adjusting at your specific annual reset date.

MCLR is typically calculated using the formula: MCLR = Marginal Cost of Funds (MCOF) + Negative Carry on CRR + Operating Costs + Tenure Premium

1. Marginal Cost of Funds (MCOF): The incremental cost incurred by the bank for obtaining additional funds — including the cost of deposits, borrowings, and other fund sources
2. Negative Carry on Cash Reserve Ratio (CRR): Banks must maintain a portion of deposits as cash reserves with the RBI, which earns no interest — the cost of this non-earning reserve is factored in
3. Operating Costs: Various operational expenses — employee salaries, administrative costs, rent, utilities
4. Tenure Premium: A premium applied over MCOF to account for loan tenure, since longer-term loans generally carry higher risk, determined based on the average maturity of the bank's liabilities

Banks review their MCLR periodically, typically monthly or quarterly, to incorporate changes in funding costs and other relevant factors, and must disclose their MCLR by the last working day of each month on their websites and at branches.

MCLR (Marginal Cost of Funds-Based Lending Rate) is calculated using four components: marginal cost of funds, negative carry on the Cash Reserve Ratio (CRR), operating costs and tenure premium.

The Base Rate system, introduced by the RBI in July 2010 to replace the earlier Benchmark Prime Lending Rate (BPLR), was itself replaced by MCLR in April 2016 to enhance monetary policy transmission and increase interest rate transparency.

MCLR (Marginal Cost of Funds-Based Lending Rate) is an internal benchmark banks use to determine interest rates on certain loans. Introduced by the Reserve Bank of India (RBI) with effect from 1 April 2016, it replaced the Base Rate system to improve the transmission of policy rate changes to lending rates.

Benefits
 

• Transparent pricing through measurable components (repo rate, CRR, operational costs)
• Predictability — borrowers know when rate changes may occur, aiding EMI management
• Cost efficiency, generally offering lower rates than the older Base Rate system, particularly following RBI rate cuts

• Structured, systematic adjustment, preventing sudden fluctuations

  
  
  

Limitations
 

• Slow rate transmission — reductions take effect only after your specific reset period, not immediately
• Partial bank discretion — while more transparent than Base Rate, banks retain some flexibility in final lending rate determination
• Varying reset schedules across banks — some review every six months, others annually
• Superseded by RLLR: Repo-linked lending rate (RLLR) loans now tend to pass on RBI rate cuts faster than MCLR-based loans, since RLLR is directly tied to the repo rate without the internal cost-of-funds buffer MCLR incorporates

To switch an existing loan from the Base Rate system to MCLR, contact your lender to confirm whether the option is available, understand the applicable fees and terms, and follow the following conversion process:

1. Approach your bank directly and formally request the switch from Base Rate to MCLR
2. The bank evaluates your request, and may charge a nominal conversion fee
3. Compare the resulting terms — MCLR is generally lower than Base Rate, as it more accurately reflects current funding costs, potentially leading to reduced EMIs or a shorter effective tenure
4. Confirm before switching — always compare the complete new terms and conditions to ensure the conversion genuinely benefits you financially

If your loan was taken before April 1, 2016, it may still be linked to the Base Rate regime — switching is worth considering if your loan has significant remaining tenure; if nearing completion, sticking with the existing Base Rate may be simpler.

Whether your loan is linked to 1-year MCLR or another tenure, choosing the right lender makes a significant difference in your overall borrowing cost. A home loan from Bajaj Finance offers transparent pricing with no hidden charges and approval within 48 hours*.

Understanding how MCLR is calculated and how it differs from the RBI’s repo rate can help you assess why loan interest rates vary across lenders. If you're planning to buy a home, explore Bajaj Finance Home Loan options, with interest rates starting from 7.25% p.a.*, loan amounts up to Rs. 15 crore* and tenures of up to 32 years.
 

Check your Home Loan eligibility to explore your borrowing options.