Context:
HDFC Bank, India’s largest private lender, has reduced its Marginal Cost of Funds-Based Lending Rate (MCLR) by 10 basis points (bps) across select tenures, effective June 7, 2025.
What is MCLR?
MCLR (Marginal Cost of Funds-Based Lending Rate) is the minimum interest rate below which a bank cannot lend (except in special cases approved by the Reserve Bank of India). Introduced by the RBI in 2016, it replaced the older Base Rate system to make loan pricing more transparent and responsive to market changes.
Key Features of MCLR
- Dynamic Pricing: Adjusts based on:
- Repo rate changes (RBI’s policy rates).
- Deposit costs (banks’ cost of borrowing funds).
- Operating expenses & cash reserve requirements.
- Tenure-Based Rates:
- MCLR varies for different loan tenures (overnight, 1-month, 3-month, 6-month, 1-year, etc.).
- Reset Period:
- Floating-rate loans (e.g., home loans) linked to MCLR reset interest rates after a fixed period (e.g., every 6/12 months).
What This Means for Borrowers
- Lower EMIs for MCLR-linked loans (e.g., home, car, personal loans).
- Possible reduction in loan interest rates for new borrowers.
- HDFC Bank’s first rate cut in 2025, following RBI’s softer monetary stance.
Why the Rate Cut?
- Declining cost of funds due to surplus liquidity.
- Competitive pressure from other banks reducing rates.
- RBI’s pause on repo rate hikes (currently at 6.50%).
Who Benefits?
- Existing borrowers with floating-rate loans (reset after MCLR revision).
- New loan applicants seeking lower interest rates.
Why Did RBI Introduce MCLR?
- To ensure faster transmission of RBI’s rate cuts to borrowers.
- Prevent banks from delaying rate benefits to customers.
- Align lending rates with actual market conditions.
(Source: The Economic Times)
