MCLR stands for Marginal Cost of Funds Based Lending Rate. Think of it as a bank’s own price tag for money. A bank collects deposits from savers, borrows some funds from RBI, and lends them on to people buying homes, cars or running businesses. MCLR reflects what the bank’s new money costs, which sets the base for the rate you pay.

RBI introduced MCLR on 1 April 2016 to replace the older base rate, a minimum lending rate built on the bank’s average cost of funds. The base rate reacted slowly when RBI changed the repo rate (the rate at which RBI lends short-term money to banks). MCLR uses the cost of fresh funds instead, so it was meant to pass on rate changes faster.

Since October 2019, new floating-rate retail and small business loans have been linked to an external benchmark such as the repo rate. Our guide to External Benchmark Linked Rate (EBLR) explains how that works. Many older floating-rate loans still run on MCLR, which is why the term matters to borrowers in Pune, Mumbai or Ahmedabad even today.

Did You Know? RBI annual report data, as reported by Business Standard, showed that around 61% of floating-rate loans were linked to EBLR and about 36% to MCLR as of December 2024. A sizeable share of loans was still priced off MCLR.

How Does MCLR Work?

Each bank works out its MCLR once a month and publishes it for several loan lengths, from overnight to one, three or more years. Most home and personal loans are tied to the one-year MCLR. Four things drive the number: what the bank pays to attract new deposits and borrow from RBI, the cost of the cash reserve it must park with RBI, its running costs, and an extra charge for lending over longer periods.

Your loan does not follow MCLR every month. The rate is fixed on the day your loan starts and stays put until the next reset date, which your loan agreement sets and which can be no more than a year apart. On that date, the bank takes the MCLR in force, adds your spread, and recalculates. A higher rate can raise your EMI or lengthen your loan tenure(the number of years left to repay).

RBI’s repo rate matters indirectly, because banks borrow some money from RBI at that rate. On 7 October 2026, the Monetary Policy Committee (the RBI panel that sets the repo rate) raised it by 0.25 percentage points to 5.50%, the first hike since February 2023. Banks do not pass a move like this on one for one, and it reaches an MCLR-linked loan only at the next reset. Our news report on the hike covers what it means for EMIs.

Pro Tip:
Look up the reset date in your sanction letter. A rate cut announced today may reach your EMI only on that date.

MCLR Formula

RBI prescribes four building blocks for MCLR. Each bank puts in its own numbers.

MCLR Example with Real Numbers

Key Components of MCLR: What to Look For

1. Marginal cost of funds. This is the biggest part of MCLR. It moves with deposit rates and borrowing costs, so a bank that pays more to attract deposits will usually show a higher MCLR.
2. Negative carry on CRR. Banks must keep part of their deposits with RBI as the Cash Reserve Ratio, and this money earns no interest. The bank adds the cost of that idle cash to MCLR.
3. Operating costs. These are everyday running expenses. A bank that runs more cheaply has more room to price loans lower.
4. Tenor premium. Lending for longer carries more risk, so longer MCLR tenors add a higher premium. Check which tenor your loan is linked to.
5. This is the margin added to MCLR for your loan, shaped by your credit profile. Under RBI’s framework it can change only if your credit profile changes.
6. Reset date. This decides when your loan rate refreshes. It sits in your loan agreement and can be no more than a year apart.

Benefits of MCLR

1. Closer to the bank’s real funding cost. MCLR uses the cost of fresh money instead of the bank’s old average, so it was designed to pass on rate changes faster than the base rate it replaced.
2. Predictable between resets. Your rate stays fixed until the reset date. A salaried borrower in Bengaluru can budget for the EMI without worrying about a change every month.
3. Published and comparable. Banks publish MCLR for each tenor every month, so you can compare lenders on the same measure before or after taking a loan.
4. Spread protection. Under RBI’s framework, the bank cannot raise your spread just to earn a higher margin. It can do so only if your credit profile worsens.

Risks and Limitations of MCLR

1. Slow pass-through of rate cuts. MCLR can stay high because deposit rates often stay high, so a repo cut may take months to reach your loan. Ask your bank for the date of your next reset.
2. Rate rises arrive at the reset. After a hike, such as the one in October 2026, a higher MCLR can raise your EMI or stretch your tenure at the next reset. Ask your bank for an updated repayment schedule before that date.
3. An older benchmark that may cost more. New retail loans use EBLR, which follows an external rate and resets at least every three months. If your MCLR spread is high, you may pay more than a new borrower. Ask about switching and check the fees.
4. Bank-specific numbers. Each bank’s MCLR reflects its own costs, so two banks can publish different rates for the same tenor. Compare the full rate, not just the benchmark.

Important:
A lower MCLR on your bank’s website does not guarantee a lower EMI. Your own spread and reset date decide when, and how much, you benefit.

Frequently Asked Questions

1. What is MCLR in simple words?

MCLR is the minimum interest rate a bank uses as its starting point when it prices a floating-rate loan. It is based on what it costs the bank to raise new money, plus running costs. The bank then adds a spread to reach your loan rate. RBI introduced MCLR on 1 April 2016, and banks publish it every month for different loan lengths.

2. How is MCLR calculated?

A bank adds four items: the marginal cost of funds, the cost of keeping cash reserves with RBI, its operating costs and a tenor premium. The total is the MCLR for that loan length. Your loan rate is then MCLR plus a spread. The worked example above shows each step with rupee figures, so you can follow how a bank reaches the final rate.

3. What is the difference between MCLR and EBLR?

MCLR is an internal benchmark that the bank works out from its own costs. EBLR is linked to an outside rate, such as RBI’s repo rate, so it responds faster to policy changes. New floating-rate retail and small business loans have used EBLR since October 2019. Our EBLR guide explains the formula and the three-month reset limit.

4. How is MCLR different from the repo rate?

The repo rate is the rate at which RBI lends short-term money to banks, and RBI decides it. MCLR is each bank’s own lending benchmark. The repo rate is one input, because banks borrow some money at that rate, but deposit rates, reserves and running costs also matter. That is why a repo change does not move MCLR by the same amount or at the same time.

5. Does MCLR change my EMI every month?

No. Banks update MCLR every month, but your loan rate changes only on your reset date, which can be no more than a year apart. Between resets the rate stays the same. At the reset, the bank takes the MCLR then in force, adds your spread and recalculates. Your EMI or remaining loan tenure may change as a result. Your sanction letter shows the reset date.

6. Can I switch from an MCLR loan to an EBLR loan?

Banks generally let existing borrowers move to the newer benchmark, though terms differ. Many charge a one-time switching fee and may offer a different spread, so compare the total saving against the fee before you decide. Also check any prepayment or foreclosure charges, although RBI’s 2026 rules limit these on floating-rate loans.

7. Does a lower MCLR always mean a lower loan rate?

No, and this is a common misconception. Your loan rate is MCLR plus your spread, and it changes only on your reset date. A bank can show a lower MCLR today while your loan rate stays unchanged for months. A higher spread can also cancel out the benefit. Compare the full rate, not just the headline MCLR.

8. When should I review my MCLR-linked loan?

Review it when RBI changes the repo rate, when your reset date is near, or when a lender offers a lower EBLR-linked rate on a similar loan. If you are close to repaying, switching may not be worth the fee. If many years remain, a lower spread can save real money, so run the numbers or ask a fiduciary planner to compare the options.