The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at. MCLR is a tenor-linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan.
MCLR is closely linked to the actual deposit rates and is calculated based on four components: the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.
The Reserve Bank of India introduced the MCLR methodology for fixing interest rates from 1 April 2016. It replaced the base rate structure, which had been in place since July 2010.
Under the MCLR regime, banks are free to offer all categories of loans on fixed or floating interest rates. The actual lending rates for loans of different categories and tenors are determined by adding the components of spread to MCLR. Therefore, the bank cannot lend at a rate lower than MCLR of a particular maturity, for all loans linked to that benchmark.
Fixed-rate loans with tenors of up to three years are also priced according to MCLR. Banks review and publish MCLR of different maturities, every month. Certain loan rates, like that of fixed-rate loans with tenors above three years and special loan schemes offered by the government, are not linked to MCLR.