Can a borrower choose between MCLR and Base Rate while taking a loan?
Curious about MCLR Rates
No, borrowers cannot choose between MCLR (Marginal Cost of Funds Based Lending Rate) and Base Rate while taking a loan. The Reserve Bank of India (RBI) has discontinued the use of the Base Rate system for new loans since April 1, 2016. Instead, it has mandated banks to use the MCLR system for determining lending rates.
The MCLR system is considered more transparent and responsive to changes in the interest rate environment compared to the Base Rate system. It takes into account the actual cost of funds for the bank and is based on factors such as the repo rate set by the central bank, operating costs, and other parameters. This allows for a more dynamic pricing of loans.
Therefore, when applying for a loan, borrowers are offered interest rates based on the prevailing MCLR of the bank and the applicable spread or margin determined by the bank based on the borrower's creditworthiness. The MCLR rates are revised periodically (usually on a monthly basis), and any changes in the MCLR rate will impact the interest rate on the loan.
It's important for borrowers to understand the MCLR methodology and the specific terms and conditions associated with the loan product they are applying for, including the spread or margin that will be added to the MCLR to determine the final interest rate.