Tipping Point: What is MCLR?

If you took a home loan after April 2016, it would be linked to a benchmark called MCLR

If you took a home loan after April 2016, it would be linked to a benchmark called the marginal cost based lending rate (MCLR). Earlier, home loan rates were linked to the base rate. MCLR is determined based on four criterion: marginal cost of funds, negative carry on account of cash reserve ratio (CRR), operating costs, and tenure premium. Marginal cost of funds depends on the bank’s deposit rates, borrowing costs, and return on net worth. Operating cost includes things like cost incurred in raising funds. Tenure premium means that longer period loans attract a higher rate. Your home loan rate is the MCLR plus a spread.  

What is the impact of reset period?  

Home loans are linked to the six-month or the one-year MCLR. This will determine the frequency at which your home loan rate gets reset. If you have a loan based on the one-year MCLR, your bank will be able to reset your loan only once in a year — a relief in a rising rate regime.