investment banking firmwhat is mclr mclr is an interest rate benchmark a benchmark rate is the lowest rate at which a bank can lend lenders apply their markup over this benchmark to create a retail rate of lending for example lets say a bank has a oneyear mclr of 710 over which it applies a markup of 35 basis points which gives us a retail rate of 745mclr is an internally produced benchmark by banks it is set for various tenors ranging between overnight and three years banks link their deposit and loan rates to various mclr tenors for example a government bank benchmarks its home and auto loan rates to its oneyear mclr explains adil shetty ceo of bankbazaarhow is mclr calculatedmclr is calculated on the basis of cash reserve ratio marginal cost of funds tenor premiums and operational cost of the bank if the cost of funds goes up the mclr increases and the loans linked to any mclr tenor get more expensive similarly if the mclr comes down your loans get cheaper how does it workbank loans issued between april 1 2016 and october 2019 are all linked to mclr home loans issued after that date are linked to externally produced benchmarks such as the repo rate borrowers have the option of refinancing their mclrlinked loans to repolinked loans which are known to be more transparently priced and better transmitters of policy rate cuts added shettywhat does the latest hike in mclr implythe latest spikes in mclrs at various banks indicate that deposit and loan rates are poised to rise for mclrlinked loan takers the rate reset might happen as indicated in their loan agreement typically mclrlinked home loans have rate resets once every six or twelve months point to note under the mclr regime banks are mandated to adjust their interest rates as soon as the repo rate changes most economists are expecting the rbi to hike the repo rate by 25 basis points from 4 percent now as early as the june policy banks are already assuming that such a hike will occur which is why several have hiked their mclrs but this hike will be applicable only on floating rate loans and not on fixed interest rate loanswhat happens when rates risetypically in a rising rate environment lenders keep the emi same and increase the loan tenure to account for higher interest burden however certain longtenor loans such as home loans where increase in tenor may not be possible the lenders will have to increase the emis also which will increase the debt servicing burden for the borrowers this could mean lower disposable incomes leading to adverse impact on consumption and demand higher emis could also result in increase in delinquencies for lenders said icras guptawhat should a borrower doborrowers need to assess their situation to understand if it makes sense for them to remain with an mclrlinked loan with the possibility that their reset may still be months away which allows them to