MCLR BASE RATE

Home loans, car loans, and personal loans all depend on one crucial factor—the interest rate set by banks. Behind every loan, there’s a benchmark that determines how much borrowers pay and how banks earn. Two important terms you will often come across are MCLR (Marginal Cost of Funds Based Lending Rate) and the Base Rate.

If you are confused about how they work, how they affect your EMI, and what the current base rate in India is, this guide is for you. We’ll break everything down in simple language and provide step-by-step clarity.

Table of Contents

• Base Rate and MCLR
• What is MCLR
• RBI Replace the Base Rate with MCLR
• How the Base Rate Works
• Present Status of Base Rate in India
• Difference Between Base Rate, MCLR, and Repo-Linked Rates
• Impact of Base Rate and MCLR on Borrowers
• How to Check the Current Base Rate in India
• Should You Switch from Base Rate to MCLR or Repo-Linked Rate?
• RBI’s Role in Setting Base Rate and MCLR

Introduction to Base Rate and MCLR

The base rate is the minimum interest rate that a bank can charge its customers. It was introduced by the Reserve Bank of India (RBI) in July 2010 as a replacement for the earlier Benchmark Prime Lending Rate (BPLR) system. The base rate RBI mechanism aimed to bring more transparency to lending and ensure that borrowers received fairer rates, rather than banks giving arbitrary concessions to large corporates.

In other words, no bank could lend below its bank base rate, except for a few exceptions like loans to staff or loans under special government schemes.

What is MCLR?

In April 2016, the RBI introduced the Marginal Cost of Funds-Based Lending Rate (MCLR) as the new benchmark for lending rates. The reason was simple – the base rate in India was becoming outdated. Banks were not passing on the RBI’s rate cuts to borrowers quickly. To address this, the RBI introduced the MCLR, which links loan rates more closely to the cost of funds, making them more responsive to monetary policy changes.

Why Did RBI Replace the Base Rate with MCLR?

To understand the shift, let’s look at the differences

The base rate RBI introduced was an improvement over BPLR, but it still lagged when RBI changed repo rates. Banks often delayed passing on benefits. With MCLR, changes in the present bank rate are supposed to reflect more quickly in loan rates.

How the Base Rate Works

The bank base rate was calculated based on several factors:

1. Cost of deposits – the interest banks pay to depositors.
2. Operating expenses – the cost of running branches, ATMs, and services.
3. Profit margin – a basic margin added by banks.
4. Cost of maintaining CRR/SLR – regulatory requirements from RBI.

So, if you took a loan in 2012, your EMI depended on the current base rate in India declared by your bank. If the base rate today were 9.5%, you couldn’t get a loan below that, no matter your credit score.

Suggested read: MCLR Based Home Loans

What is the Present Status of Base Rate in India?

Even though RBI shifted to MCLR in 2016 and later to external benchmarks like the repo rate, the base rate still applies to old loans that were taken before April 2016. Borrowers who haven’t switched continue paying interest linked to the bank base rate.

• The current base rate in India (as of recent RBI data) generally ranges between 8.70% and 9.40%, depending on the bank.
• RBI still requires banks to publish their base rate today for transparency.
• Borrowers have the option to switch from base rate to MCLR or repo-linked lending rates for potentially lower EMIs.

Difference Between Base Rate, MCLR, and Repo-Linked Rates

To make things easier, here’s a side-by-side comparison:

This shows that while the base rate in India was a step forward in its time, the system has evolved further for better borrower benefits.

Impact of Base Rate and MCLR on Borrowers

For Borrowers Under Base Rate

1. Higher EMIs: Since the current base rate in India ranges between 8.70% and 9.40%, many old borrowers are paying more than those on MCLR or repo-linked loans.
2. Slower Adjustment to RBI Policies: When RBI cuts the repo rate, banks under the base rate system are not required to pass on the benefit quickly. This means you may keep paying the same EMI even if the present bank rate falls.
3. Transparency Issues: The formula for the bank base rate included multiple internal cost components of the bank. Borrowers often had no clear visibility into how these costs translated into the rate they were charged.
4. Limited Negotiation Power: Even if you had an excellent repayment record or strong credit profile, banks could not lend to you below their base rate today. This reduced flexibility for well-qualified borrowers.

For Borrowers Under MCLR

For borrowers who shifted to MCLR after 2016, the impact was relatively positive:

• Closer Link to RBI Policy: Because MCLR is calculated using the marginal cost of funds, it changes more in line with RBI repo cuts and hikes. Borrowers benefit faster than under the base rate.
• Reset Periods: MCLR loans usually have reset periods (e.g., 6 months, 12 months). This means your EMI won’t change immediately after an RBI announcement but will adjust when your reset date arrives.

1. If RBI cuts repo rate by 50 basis points (0.5%), and your MCLR reset is due in 2 months, you’ll see the benefit in your EMI at that time.
2. Conversely, if RBI hikes rates, your EMI may increase after the reset period.

• Transparency: Banks are required to publish their MCLR across different tenures (overnight, 1-month, 3-month, 1-year). Borrowers can see and compare these rates more easily than the old base rate RBI system.
• More Borrower-Friendly than Base Rate: For most borrowers, moving from base rate now to MCLR meant lower EMIs, particularly in a falling interest rate environment.

For Borrowers Under Repo-Linked Rates

1. Fastest Benefit from RBI Rate Cuts: Since these loans are tied directly to the RBI repo rate, changes are passed on almost immediately. If RBI cuts the repo by 0.25%, your loan rate will reduce right away.
2. Greater Volatility: The flip side is that when the RBI raises repo rates, your EMI increases quickly too. This can make repayment planning a little uncertain compared to the slower-moving MCLR or bank base rate.
3. Best Transparency: Borrowers can check the present bank rate (repo rate) directly from the RBI’s website. This makes it easy to verify if banks are applying the correct rate plus their spread.

How to Check the Current Base Rate in India

If you have an old loan and want to know your base rate now, you can:

1. Visit your bank’s official website – every bank publishes its current base rate and MCLR rates.
2. Check RBI’s official website – RBI collects and shares the present bank rate and base rate RBI data.
3. Call your branch – they will inform you of the base rate applicable to your loan.

Should You Switch from Base Rate to MCLR or Repo-Linked Rate?

If you are still on the base rate in India, here’s what you need to consider:

1. Savings Potential: Switching could lower your EMI if the current base rate is higher than repo-linked rates.
2. Charges: Banks may levy a conversion fee, typically 0.25% to 0.5% of your outstanding loan.
3. Loan Tenure Left: If only a few years remain, the benefit may be small.

Example: If your outstanding loan is ₹20 lakh with 15 years left, and your bank base rate is 9.25%, while repo-linked is 8.5%, switching can save you several lakhs in interest.

RBI’s Role in Setting Base Rate and MCLR

RBI does not set the base rate today or the MCLR directly. Instead, it provides a framework. Each bank decides its rates based on the formula provided by the RBI. However, the RBI does announce the present bank rate, which influences overall lending rates.

The base rate RBI introduced was a step toward uniformity, but MCLR and repo-linked rates brought borrowers even closer to the central bank’s policies.

Conclusion

The journey from base rate in India to MCLR and finally to repo-linked rates shows how India’s banking system has evolved to benefit borrowers. While the bank base rate served as an important reform in 2010, it was eventually replaced for better efficiency and transparency.

If you still have a loan under the base rate RBI framework, it’s time to explore switching. Always check the current base rate in India against MCLR and repo-linked rates. By doing so, you can ensure you’re not overpaying on your EMIs.

Remember, the base rate now may not give you the best deal. Staying informed about the base rate today and the alternatives is the smartest financial step you can take.

FAQs about MCLR BASE RATE