Marginal Cost of Funds based Lending Rate (MCLR)

A loan rate is built from two parts. The benchmark is the starting rate. The spread is what the bank adds on top.

Which systems has India used?

• BPLR (April 2003): the Benchmark Prime Lending Rate. It failed because many loans were priced below it.
• Base Rate (July 2010): it replaced BPLR. Banks could build it from average, marginal or blended cost of funds.
• MCLR (1 April 2016): an internal benchmark. Each bank works it out from its own marginal cost of funds.
• EBLR (1 October 2019): an external benchmark. It is linked to a market rate such as the repo rate.

Does each system replace the one before it?

Not fully. Old loans on BPLR, Base Rate and MCLR continue until repayment or renewal. EBLR runs alongside MCLR. It does not replace it.

Why did RBI keep changing the benchmark?

The aim of the 2016 and 2019 changes was the same. RBI wanted its policy rate changes to reach borrowers. Experts call this transmission. An RBI study group later found that transmission was slow and incomplete under both the Base Rate and MCLR.

RBI announced the MCLR guidelines on 17 December 2015. They took effect on 1 April 2016. RBI said they were expected to improve transparency in how banks set loan rates.

What was wrong with the Base Rate?

• Banks could use average, marginal or blended cost of funds.
• The RBI study group found that banks often departed from the stated methods.
• Some banks raised the return on net worth sharply. That kept the Base Rate high.

What does MCLR cover?

• Floating-rate rupee loans sanctioned or renewed from 1 April 2016 are priced off MCLR.
• A release of 29 March 2016 also brought fixed-rate loans of up to three years under MCLR.
• MCLR is an internal benchmark. Each bank calculates its own.

What happened to existing Base Rate loans?

They could continue until repayment or renewal. A borrower could move to MCLR on terms both sides accepted. The rules did not promise a free switch.

MCLR is the sum of four parts. Each part has a rule.

How is the marginal cost of funds worked out?

It is 92% of the marginal cost of borrowings plus 8% of the return on net worth. The 8% matches the common equity tier 1 capital a bank must hold: 5.5% plus 2.5% of risk-weighted assets.

What is negative carry on CRR?

Banks must keep a cash reserve ratio (CRR) balance with RBI. That balance earns nothing. The bank still pays for the money behind it. RBI’s formula is the required CRR times the marginal cost, divided by one minus the CRR.

What do operating costs and tenor premium mean?

• Operating costs leave out services that a bank recovers through separate service charges.
• The tenor premium is the same for every loan of a given tenor.
• It cannot depend on the borrower or the type of loan.

Why is SLR not on the list?

The statutory liquidity ratio (SLR) is a separate rule. It is not one of the four MCLR components.

The bank adds a spread to its MCLR. The sum is the rate you pay.

What do banks publish?

• MCLR for five tenors: overnight, one month, three months, six months and one year.
• A review of these rates every month, on a date announced in advance.

What is the spread made of?

• The business strategy premium.
• The credit risk premium.

A bank may not lend below the MCLR for a particular maturity. In other words, MCLR is a floor. An existing borrower’s spread cannot rise unless the credit quality worsens. That protection does not apply to consortium or multiple-banking loans.

When does the rate reset?

Each loan has its own reset date. It is linked to the date of first disbursement or to the MCLR review date. The MCLR on the date of first disbursement applies until the next reset date.

The reset period is one year or less. It corresponds to the tenor of the MCLR the loan is linked to. A one-year MCLR loan can therefore wait a year to feel a rate change.

MCLR did not fix transmission.

What did the study group find?

RBI announced a study group on 2 August 2017. Janak Raj chaired it. It submitted its report on 25 September 2017.

• Transmission was slow and incomplete under both the Base Rate and MCLR.
• Banks often departed from the stated methods.
• Annual reset periods slowed transmission further.

How did the EBLR timeline unfold?

1. 5 December 2018: RBI said banks would move to an external benchmark from 1 April 2019.
2. 4 April 2019: RBI paused the move for more talks.
3. 4 September 2019: RBI issued a circular. It made external benchmarks mandatory from 1 October 2019.

What numbers showed the gap?

RBI cut its policy rate by a cumulative 75 basis points from February to June 2019. Banks cut fresh-loan rates by only 29 basis points in that time. A basis point is one hundredth of a percentage point.

On 4 September 2019 RBI said transmission under MCLR had not been satisfactory.

An EBLR loan is pegged to a rate that the bank does not control.

Which benchmarks can a bank use?

• The RBI policy repo rate.
• The three-month Treasury Bill yield published by FBIL.
• The six-month Treasury Bill yield published by FBIL.
• Any other benchmark published by FBIL.

A bank must use one benchmark within a loan category. It cannot mix them.

How often does an EBLR loan reset?

At least once in three months. That is much faster than the one-year MCLR cycle.

How is the spread set?

• The bank is free to choose the spread.
• The credit risk premium changes only when the credit assessment changes substantially.
• Other spread components can change once in three years. A bank may cut them earlier to keep a customer.

Which loans fall under EBLR?

• New floating-rate retail loans and loans to Micro and Small Enterprises, from 1 October 2019.
• Loans to Medium Enterprises, from 1 April 2020.
• Banks may also offer EBLR loans to other borrowers.

Can old loans switch?

Existing loans stay on MCLR, Base Rate or BPLR until repayment or renewal. Prepayable floating-rate term loans can switch to EBLR without fees. The bank may recover only reasonable administrative and legal costs.

Many are. EBLR leads, but MCLR has not gone away.

What does the latest RBI data say?

• At end-June 2026, 68.2% of outstanding floating-rate rupee loans of scheduled commercial banks were EBLR-linked.
• At that date 29.6% were linked to MCLR.
• At end-March 2026 the shares were 67.6% and 30.2%.

One press report said 61% were EBLR-linked and 36% MCLR-linked in December 2024. Treat that as a single-source figure.

Why does MCLR persist?

• Existing loans stay on their old benchmark until repayment or renewal.
• EBLR is mandatory only for the loan categories above. Other loans may still use MCLR.

What are rates doing now?

The one-year median MCLR of scheduled commercial banks fell to 8.61% in September 2026 from 8.70% in August. The weighted average lending rate was 8.96% on outstanding loans and 8.61% on fresh loans in August 2026.

The repo rate is RBI’s policy rate. The Master Direction lists it as one allowed EBLR benchmark.

What was the path since 2025?

• February 2025: cut to 6.25%.
• April 2025: cut to 6.00%.
• June 2025: cut to 5.50%.
• December 2025: cut to 5.25%.
• 7 October 2026: raised by 25 basis points to 5.50%. The vote was unanimous.

RBI also moved its stance to calibrated tightening. The standing deposit facility rate is 5.25%. The marginal standing facility rate and Bank Rate are 5.75%.

What does a hike mean for borrowers?

• An EBLR loan pegged to the repo rate can reprice within three months.
• An MCLR loan waits for the bank to change its MCLR, and then for its own reset date.

What is the outlook?

RBI says rate cuts are off the table in the near term. Consumer inflation was 4.8% in August 2026. RBI projects 5.2% for 2026-27. The next policy meeting is on 2 to 4 December 2026.

RBI has proposed a rewrite of interest-rate rules. It has not finalised it.

What happened in August 2026?

• 5 August 2026: RBI said it would rationalise interest-rate rules. It named operational aspects of the current MCLR and EBLR framework.
• 12 August 2026: RBI released draft Interest Rates on Loans and Advances Directions, 2026.
• The draft covers banks, NBFCs, AIFIs, RRBs and urban and rural co-operative banks.
• Comments were due by 11 September 2026 on the Connect 2 Regulate portal.
• Final Directions will be issued separately for each category.

Why does RBI want a rewrite?

RBI cited divergent practices. It named the determination of MCLR, an internal benchmark, and its components. It also said the rules for fixed-rate loans are very limited.

What do press reports say it proposes?

• MCLR would be a three-month moving average of the weighted cost of fresh deposits and borrowings.
• Floating-rate loans would reset within three months from 1 April 2027.
• Existing loans would migrate by 1 April 2029. The draft proposes borrower consent and no extra fee.
• Spread parts other than credit risk would stay fixed for three years.
• One report adds that the data would be system-generated and independently verifiable.
• One report says floating personal and MSME loans would move to an external benchmark.

The RBI draft text itself was not opened. These details come from news reports.

Is it final?

No. The policy statement of 7 October 2026 carried no final interest-rate Directions.

Use this list to check an answer before you commit.

What are the common traps?

• SLR is not an MCLR component. The four are marginal cost of funds, negative carry on CRR, operating costs and tenor premium.
• The three-month reset belongs to EBLR. An MCLR loan can reset up to a year later.
• EBLR does not replace MCLR. The two run side by side.
• Medium Enterprises came later. Micro and Small loans moved on 1 October 2019. Medium followed on 1 April 2020.
• The 2026 changes are proposals. Do not treat them as final law.

What did UPSC ask in 2016?

UPSC CSP 2016 asked for the purposes of the MCLR guidelines. Two statements were offered.

• Statement 1: the guidelines improve transparency in how banks set loan rates.
• Statement 2: they help ensure credit at rates fair to borrowers and banks.

Both are correct. RBI’s December 2015 release says the guidelines are expected to improve transparency and ensure fair credit. The answer is both 1 and 2.

What did CAPF ask in 2026?

The answer follows from the RBI dates in this lesson. BPLR came in 2003, the Base Rate in 2010, MCLR in 2016 and EBLR in 2019. That gives A-3, B-4, C-2, D-1.