What happens when MCLR increases?

When the Marginal Cost of Funds Based Lending Rate (MCLR) increases, your loan interest rate will go up, leading to higher Equated Monthly Instalments (EMIs).

Understanding MCLR and Its Impact

The Marginal Cost of Funds Based Lending Rate (MCLR) is a benchmark interest rate that banks use to determine the interest rates for various types of loans, particularly floating-rate loans. It reflects the minimum interest rate a bank can charge for a specific loan product. When there is a change in the MCLR, it directly impacts the cost of borrowing for consumers.

Direct Consequences of an MCLR Increase

An increase in the MCLR has several direct and significant effects on borrowers, primarily those with loans linked to this benchmark.

• Higher Loan Interest Rates: The most immediate impact of an MCLR increase is a rise in the interest rate applicable to your loan. Banks are obligated to reset their floating interest rates based on the revised MCLR.
• Increased Equated Monthly Instalments (EMIs): As your loan interest rate climbs, your monthly repayment amount, known as the EMI, will also increase. This means you will need to pay more money each month towards your loan principal and interest.

Practical Implications for Borrowers

For individuals and businesses with existing loans linked to the MCLR, an upward revision can have several practical implications:

• Budgetary Strain: Higher EMIs can put a strain on monthly budgets, especially for those with tight financial planning. This might necessitate re-evaluating other expenses.
• Reduced Disposable Income: With more money allocated to loan repayments, borrowers will have less disposable income for savings, investments, or discretionary spending.
• Loan Affordability: For new borrowers, a higher MCLR can make loans less affordable, potentially impacting their ability to qualify for larger loan amounts or specific loan products like home loans or car loans.
• Loan Tenure (Less Common): While typically EMIs increase, in some rare cases (or if specifically opted for), banks might extend the loan tenure to keep EMIs constant, but this is less common and usually results in paying more interest over the long run.

How MCLR Differs from Repo Rate Impact

It's important to distinguish between the impact of MCLR and the Repo Rate. While changes in the repo rate, which is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks, can indirectly influence your loan interest rates, an MCLR change directly dictates the interest rates on loans linked to it. The MCLR takes into account various factors, including the marginal cost of funds, negative carry on account of Cash Reserve Ratio (CRR), operating costs, and tenor premium.

Example Scenario

Consider a scenario where you have a home loan linked to the MCLR:

Please note: The EMI calculation in the example is illustrative and depends on the outstanding principal, remaining tenure, and revised interest rate.

In conclusion, an increase in the MCLR directly leads to an increase in your loan interest rate, subsequently raising your Equated Monthly Instalments and increasing your financial burden.