What is base rate vs. MCLR?

Base Rate and MCLR are two different benchmark systems used by Indian banks to price their loans, including home loans. Base Rate was the predecessor to MCLR. While both serve as the floor for lending rates, they differ significantly in their calculation methodology and responsiveness to RBI policy changes.

Base Rate

• Introduced in July 2010 to replace the BPLR (Benchmark Prime Lending Rate) system.
• Calculated based on cost of funds, operating expenses, minimum return on net worth, and CRR cost.
• Applicable to loans sanctioned between July 2010 and March 2016.
• Known for slow transmission rate cuts by RBI took a long time to benefit borrowers.

MCLR (Marginal Cost of Funds Based Lending Rate)

• Introduced in April 2016 to improve rate transmission.
• Based on marginal (incremental) cost of funds more sensitive to current market rates.
• Resets periodically (typically every 6 or 12 months).
• More dynamic than Base Rate but still slower than RLLR.

Key Comparison

• Base Rate: Uses average cost of funds less responsive to policy changes.
• MCLR: Uses marginal cost faster but still internal benchmark.
• RLLR: Uses external repo rate fastest and most transparent.

Current Status

• New loans are no longer given at Base Rate or MCLR for floating rate retail loans.
• Existing Base Rate loans can be switched to MCLR or RLLR.

Understanding the evolution from Base Rate to MCLR to RLLR helps borrowers appreciate why older loans may carry higher rates. Switching to RLLR-linked pricing is often beneficial, especially during falling interest rate cycles.