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Link between MCLR and CIBIL Score

The full form of MCLR is Marginal Cost of Funding-based Lending Rate. This is a type of lending rate which is charged by banks. It is a minimum interest rate at which a bank lends, below which, the bank is not allowed to lend. MCLR was established in 2016 by the RBI as a replacement to the old system of Base Rate of interest on loans. With the establishment of the MCLR system, all previous base rate linked loans and credit exposures are required to migrate to MCLR. The RBI has set up a facility to link the base rate for loans given by banks to the MCLR system starting 1st of April, 2018. This will benefit borrowers who have borrowed on base rate. MCLR is derived from the following factors:

  • Marginal cost of funds
  • Tenor premium (which pays off the risk on long-term loans)
  • Operating expenses
  • Cost of Cash Reserve Ratio (CRR) The traditional base rate system is derived from the average cost of funds and minimum rate of return. MCLR reflects the Repo Rate set by the RBI. A repo rate is a rate at which commercial banks borrow money from the RBI in case they run out of funds. This means that lower the repo rates, lower will be the interest rate at which commercial banks float loan to the end-customers. Therefore, MCLR helps in passing on any changes in policy rates set by the RBI to the banking customer. As mentioned above, the MCLR system has been successfully put into effect from this financial year and will be applicable on loans. This implies that any loan taken (car or home loans) will be based on the MCLR system post march 2018. As directed by the RBI, the MCLR applicable on any type of loan has to be in a 1-year rate or of a lower tenure. Banks have an option to choose either a six month or a standard 1-year MCLR. Banks also have the option to add a small percentage of interest over the MCLR for any of the loans offered. This implies that the interest rate of the loan will be reset as per the benchmark MCLR on an annual basis, provided it is a floating rate loan or a fixed loan less than 3 years in tenure. Let us illustrate this with a simple example. Bank A has set its 1-year MCLR at 9.2%. You have decided to take a home loan on June 2016 at a floating rate of interest. The bank decides to add a small percentage of interest equivalent to 25 basis point. Thus, the final rate of interest offered by bank A to you will be 9.45%. Taking this into consideration, if the MCLR slumps to 9.1% next financial year, the interest rate offered by Bank A will comes down to 9.35%.

What is a CIBIL Score?

A CIBIL score is a credit score ranging from 300 to 900 and is generated by TransUnion CIBIL. This score is a clear indicator of an individual's creditworthiness, that is, their capacity to repay borrowed credit. Almost all banks and credit lending institutions check the credit score of an individual before giving a new loan or a credit card. Basically, a credit score determines if you are a good borrower or not. Your credit score is highly depended on your repayment credit history and timely payments of credit card bills and equated monthly installments.

Link between MCLR and CIBIL Score

There is no such specific or direct relation between MCLR or CIBIL Score as your CIBIL score simply indicates if you are eligible for an MCLR based loan at a specific rate. If your CIBIL score is high, you do not need to worry about loan rejection. But if you have a low cibil score, banks will most likely reject the loan or charge a higher rate of interest. Therefore, it is essential that you maintain a higher CIBIL score in case you seek a loan based on the MCLR system in the near future.

FAQs On Link between MCLR and CIBIL Score

What is Repo Rate?

Repo Rate is the rate at which commercial banks borrow money from the Reserve Bank of India in case they run out of funds.

What are basis points?

A basis point is a common unit of measurement of interest rates. One basis point is equivalent to 0.01% and it is used to indicate a change in a financial instrument such as the rate of interest of a loan. The MCLR system in India has successfully replaced the traditional system of base rate of interest on loans. The base rate is built upon the basis points and it represented as a percentage.

What is the MCLR for SBI Home Loan?

SBI has recently raised its 1-year MCLR to 8.15% from 7.95% for FY 2018. SBI has a spread of 40 basis points over the MCLR for normal borrowers while it stands at 35 basis points over the MCLR for women borrowers.