How is MCLR better than base rate?
The MCLR framework aims to significantly improve the transmission of cuts in policy rates to the end-borrowers by mandating banks to set rates based on their marginal cost of funds rather than their average cost of funds.
It may be noted that this change is only for banks and not applicable to Non-banking financial companies (NBFCs).
In a falling interest rates scenario, under MCLR, if a borrower avails of the loan on 1st April 2019, and if the bank decides to cut rates on 5th April 2019, the borrower will get the benefit only after a gap of one year. But, at the same time, borrowers would be protected when the rates climb. Even if the rates go up, the new rates would be applicable when they are due for reset.
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