Canara Bank hikes MCLR rate by 5 bps — Here's a look at how this impacts your auto, home and personal loan repayments

Canara Bank on Tuesday hiked its Marginal Cost of Funds Based Lending Rate (MCLR) rate by 5 basis points (bps), effective from 12 May, according to the public sector lender's filings with the exchanges.

MCLR rate benchmarks impacts banks' floating-interest rate loans across tenors for auto or car loans, home loans, personal loans; and is revised periodically in line with a bank's changing policies.

It differs from the repo rate as MCLR is the minimum applicable rate for customers borrowing from banks, while the latter is the rate at which banks can borrow from the central bank, the Reserve Bank of India (RBI).

What is Marginal Cost of Funds Based Lending Rate (MCLR)?

Implemented in 2016, Marginal Cost of Funds Based Lending Rate or MCLR is the minimum interest rate at which banks can lend, except when the watchdog and central bank intervene and instructs a different rate of interest.

Notably, updates to the MCLR directly impacts interest rates applicable for loans and can lead to higher equated monthly installment (EMI) payments for floating-interest linked loans.

However, interest rates for savings account, fixed or recurring deposits or fixed interest loans are not linked to these revisions and will remain unchanged by hike in MCLR.

How does MCLR revision impact borrowers?

From the perspective of borrowers, it is the one-year MCLR which is crucial, as most retail loans, including borrowing for auto or car loans, home loans and personal loans are linked to it. This decision, therefore, can directly influence an individual's borrowing and personal finance management decisions.

Simply, an MCLR cut can lower interest rates and EMIs for borrowers, while increase in MCLR can lead to higher rates and EMIs for customers.

Overall, MCLR directly affects interest paid on all floating-rate loans and can in effect increase or decrease after the next reset period. Thus, for borrowers with Canara Bank, this MCLR revision will be applicable for new loan offers, renewals and resets on and after 12 May this year.

In case of major or multiple loans that have an impact on your financial planning, it is best to consult with your Chartered Accountant or certified financial advisor to consider balance transfer or refinancing options as applicable.

Further, it is not only retail and one-year loan tenor set to be impacted. Change in MCLR is also applicable for credit facilities where borrowers opt to switch to MCLR-linked interest rates, according to a Clear Tax report.

How do banks calculate MCLR?

• MCLR is calculated based on the loan tenor, i.e., the amount of time a borrower has to repay the loan, as per the Clear Tax report.

• It added that this tenor-linked benchmark is internal in nature and the bank determines the actual lending rates by adding the elements spread to this tool.
• The banks, then, publish their MCLR after careful inspection. The same process applies for loans of different maturities, be it monthly or as per a pre-announced cycle, as per the report.

Canara Bank: What is the revised MCLR rate?

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.