What is MCLR! Does your loan become expensive immediately due to its increase?
Recently, two government banks PNB and BOI have increased MCLR. When there is a change in MCLR, it also affects your loan. Let us understand what is MCLR and does its increase make the loan expensive immediately?
What is MCLR! Does its increase make your loan expensive immediately?
Recently, two government banks PNB and BOI have increased MCLR. PNB has increased MCLR by 0.05 percent i.e. 5 basis points for all periods. At the same time, Bank of India has increased MCLR by 0.05 percent for a period of one year. MCLR means Marginal Cost of Funds Based Lending Rate. When there is a change in MCLR, it also affects your loan. When MCLR increases, your loan also becomes expensive. Let us understand what is MCLR and does its increase makes the loan costly immediately.
First, understand what is MCLR.
MCLR is a method set by the Reserve Bank of India that is used by commercial banks to determine the loan interest rate. It has been implemented in India since demonetization. This has made it easier for customers to take loans. MCLR is the minimum rate below which no bank can give loans to customers. Actually, when you take a loan from a bank, the minimum rate of interest charged by the bank is called the base rate. Now banks are using MCLR in place of this base rate.
Why does the loan become costly when MCLR increases?
Since MCLR is the minimum rate, it is clear that banks cannot give loans to customers below its rate, that is, the more the MCLR increases, the higher the interest on the loan will go. In such a situation, interest rates on loans related to marginal cost such as home loan, vehicle loan etc. will increase. However, it is not that as soon as MCLR increases, your EMI will also increase from the next month. The thing to note here is that when MCLR rate increases, the interest rates on your loan do not increase immediately. The EMI of the loan takers proceeds only on the reset date.
What is the purpose of MCLR?
MCLR was implemented with the aim of improving the transmission of policy rates of lending rates of banks and making the interest rate determination process of all banks transparent. Loans like home loans have become cheaper since the implementation of MCLR. MCLR is calculated on the basis of Marginal Cost of Funds, Period Premium, Operating Expenses and the cost of maintaining Cash Reserves Ratio. Later, the loan is given on the basis of this calculation. It is cheaper than the base rate. It is mandatory for banks to declare their overnight, one month, three month, six month, one year and two year MCLR every month.
