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Explained | MCLR: What is it? How does a hike impact you?

Explained | MCLR: What is it? How does a hike impact you?

Explained | MCLR: What is it? How does a hike impact you?
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By CNBCTV18.com Apr 21, 2022 8:39 PM IST (Published)

MCLR or marginal cost of funds-based lending rate is an internal reference rate for banks set by the Reserve Bank of India (RBI).

The State Bank of India (SBI) has raised the marginal cost of funds-based lending rate (MCLR) by 10 basis points (bps) across tenures to 7.1 percent, whereas at banks such as HDFC Bank, Punjab National Bank, and ICICI Bank, the MCLR stands at 7.25 percent. Bank of Baroda, Axis Bank, and Kotak Mahindra Bank raised their MCLRs by 5 bps each across tenures. Other banks from both public and private sectors are set to raise MCLRs in the coming days.

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Here is all you need to know about MCLR and its impact.


What is MCLR?

MCLR or marginal cost of funds-based lending rate is an internal reference rate for banks set by the Reserve Bank of India (RBI). It is set to help determine a minimum interest rate on various types of loans offered by the banks. The final rate of lending, however, is usually higher as it also includes risk premium and spread charged by banks. In simple terms MCLR is the minimum rate at which banks can offer loans to end-consumers. The MCLR method was introduced to help borrowers avail various loans, like home and auto loans, and enable transparency in the interest rates.

What will be the impact of the hike in MCLR?

An increase in MCLR means an increase in equated monthly instalments (EMIs) in the coming months for borrowers who have taken home, vehicle, and personal loans. New borrowers will have to pay more to service their loans and also see a consequential rise in EMIs.



 

Adhil Shetty, chief executive officer at Bankbazaar.com, said borrowers should prepare for a gradual increase of 100 bps on their loans for this financial year starting from April 1, if inflation continues to harden, Moneycontrol reported.

Interest rates will rise too

As per bankers and experts, the RBI is gradually tightening the supply of money in the financial system. This is expected to push up interest rates. During the pandemic, extraordinary liquidity measures were taken, and liquidity was injected through various other operations of the RBI.  This has left a liquidity overhang of the order of Rs 8.5 lakh crore in the system, as per an Indian Express report.

Therefore, with retail inflation hitting 6.95 percent in March and wholesale inflation at 14.55 percent, the RBI is likely to take measures to bring it down and because of tightening of the accommodative policy, a rise in interest rates in the system is expected. The next round of rate hikes is expected to happen around the end of May or in the month of June. However, the rise in rates is expected to be gradual.

What can borrowers do to combat the hike?

With increasing MCLR rates pushing up EMIs, you can take the following two steps to reduce its impact.

1. Increase the loan tenor to reduce the EMIs

2. Make part pre-payment to reduce the EMIs

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