At first look, you will find no connection between Marginal Cost of Funding-based Lending Rate (MCLR) and your CIBIL or credit score. While MCLR is the late of lending of the banks, CIBIL score determines your credit-worthiness as a borrower. Let us take a look at both the concepts in brief before discussing how the two are related.
MCLR is the new lending rate regime that replaces Base Rate on loans. MCLR takes into account the following factors:
- Marginal cost of funds
- Tenor premium (which pays off the risk on long-term loans)
- Operating expenses
- Cost of Cost of Cash Reserve Ratio (CRR)
The base rate, on the other hand, factors in average cost of funds and minimum rate of return instead of marginal cost of funds and tenor premium. While MCLR reflects the repo rates set by the RBI, base rate does not. This means that if the repo rates stay low or go further down, the customers will be greatly benefited with lower interest rates on their loans. This new system was put in place precisely for the purpose of promptly passing on change in policy rates by the RBI to end-customers.
The MCLR will be applicable on new loans from the beginning of the fiscal year 2016-17. So any new loan you take – such as home loan or car loan – will be based on this MCLR. According to RBI directive, the MCLR applicable to each loan product has to be the 1-year rate or of a lower tenure. The banks have a choice in this – for example, State Bank of India has decided the home loan benchmark as the 1-year MCLR, while Kotak Mahindra Bank plans to use the 6-month MCLR.
The banks may also add a “spread” or a small additional percentage of interest over the MCLR for each loan product. This means that every year the interest rate of the loan – only if it is a floating rate loan or a fixed loan less than 3 years in duration – will be reset as per the benchmark MCLR.
Let us look at an example. The SBI 1-year MCLR has been set at 9.2%. If you are taking an SBI PAL Home Loan on May 5, 2016 at a floating rate of interest, then the spread applicable on the loan is 25 basis points. So the final interest rate the bank will offer you would be 9.45%. If the MCLR goes down to 9.1% next year, then your interest rate will also come down, to 9.35%.
The existing loans will continue to be dependent on base rate. Existing customers could shift to MCLR-based loan, depending on the bank agreeing to it.
Credit Information Bureau (India) Limited (CIBIL) is the oldest Indian credit information company, set up in 2000. A CIBIL score is the mirror to your credit-worthiness. A credit information report takes into account your credit behaviour – payment regularity of EMIs, insurance premiums, credit card bills, etc. – and determines whether you are a good borrower or not. Most banks now either ask for or generate your credit report when you apply for a new loan.
How is MCLR and CIBIL Score Related?
If your CIBIL score is high, more than 750, you do not need to worry about approval of loans. But if the score is low, the banks will either reject your loan application or charge you higher rate of interest. So if you want to be able to avail your home or vehicle loan at the lowest rates of interest available – which are the floating rates based on MCLR – then you will have to ensure that your CIBIL score is high enough.
While MCLR and CIBIL ratings are not directly related, CIBIL scores impact your chances of getting a loan at the MCLR-based interest rate. So get your CIBIL scores now and start working on improving them if they are not up to par!