Marginal Cost of Funds based Lending Rate (MCLR)

 MCLR is the minimum lending rate below which a bank is not permitted to lend.

The system before MCLR was the Base Rate Policy which had certain limitations of transparency and direct change of interest rate to Repo Rate (The rate at which RBI lends to commercial banks).

MCLR is an internal reference rate for banks to determine the interest they can levy on loans.

With the help of the MCLR policy, the change in interest rates of banks with respect to repo rates takes place immediately.

The bank adds a ‘spread’ (Interest rate over and above MCLR) to the MCLR and then applies an interest rate on your loans.