For the uninitiated, MCLR is calculated on the basis of four major components marginal

cost of funds, operating cost, tenor premium and negative carry on account of cash reserve
ratio (CRR). However, simply put, MCLR is the cost of obtaining funds for banks that has
now been closely linked to the repo rate. Any changes in deposit rate or repo rate impacts the
lending rates of the bank and MCLRs monthly reporting would mean banks would now be
compelled to pass on benefits of rate cuts to borrowers.
It wont be as simple for RBI to manage this as it may sound, given that they will have to
keep a record of multitude of rates spread across different tenures (monthly, quarterly, halfyearly and annually)
The MCLR regime is applicable on floating rate home loans and term loans to SMEs and
middle-level corporates. However, this will not apply to government-run credit schemes and
fixed-rate home loans, personal loans, car loans or other fixed-rate loans.
While new borrowers are covered under the MCLR system from April 1, 2016, existing
borrowers can continue with the base rate system till repayment of loans. The existing
borrowers also have an option to shift their loans to the new MCLR-based system on
mutually acceptable terms. However, once the borrowers decide to shift to the MCLR-based
system, they cannot shift back to the old base rate system.
The lenders, on their part, will have to specify the interest reset dates while sanctioning loans.
The MCLR of a loan will be applicable till its next interest reset date, irrespective of the
changes in the MCLR rates by the bank during that period. To ensure transmission of policy
rates, the RBI has capped the period between two reset dates at 1 year.
Similarly, like the old base rate system, banks are not allowed to lend below the MCLR.
For example, Axis Bank charges its floating rate home loans of up to Rs 28 lakhs @ 9.60 per
cent per annum (9.45 per cent MCLR plus 0.15 per cent spread), whose rate of interest will
be reset half-yearly. So, if you availed a home loan from Axis Bank on April 1, and the
MCLR comes down to 9.20 per cent on July 1, you will still be paying interest rate @ 9.60
per cent till September 30 as your interest reset period is six months and it will not be reset
before September 30. However, if the MCLR further gets reduced to 9 per cent p.a. on
October 1, your rate of interest will also be reset at 9.15 per cent per annum (9 per cent
MCLR plus 0.15 per cent spread) because of your half-yearly interest reset condition