Here’s an example:

 

 

In his case, at the time of borrowing, 10 years ago the banks were using the base rate mechanism to determine the interest rates. Base rate is the minimum rate fixed by all banks, below which the bank cannot charge its customers. Base rate can be different for different banks. Base rate was introduced in 2010.

 

Then the Reserve Bank of India (RBI) reduced the benchmark rates (such as repo rates), and hoped that benefit would be passed onto customers, but profit being on their minds, the banks were not very active in passing the benefit to the consumers.

 

To  improve the process, the base rate regime was moved to MCLR from April 2016. This process is expected to speed up the process of resetting the interest rates on a more actual and real time basis.

 

So if you are also looking to enjoy lower home loan interest rates, here’s what you need to ask your bank.

 

WHAT IS MCLR?

Marginal Cost of Funds based Lending Rate (MCLR)

 

6 things you need to know:

 

#You need to submit a handwritten letter to the bank.

 

#If you take an MCLR-linked loan, it means your interest rate has to be reset at least once a year. Banks also charge a premium over the MCLR rate for the particular loan instrument linked to it. This reset varies from one bank to another, and some banks even offer a 6 months reset clause. Hence this can be a good option when the interest rates have gone down.

 

# The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date (irrespective of changes in the benchmark rates during the interim period). For example, if the bank has given you a one-year reset period in your loan agreement, and your base rate at the beginning of the year is say 10%, even if the interest rate comes to 8% in the middle of the year, you will continue at 10% till the reset date. Same will be the case even if the interest rate increases above 10%.

 

#Existing borrowers like the complainant above who secured a loan based on the base rate system, can also switch to the MCLR system without any additional charge. Once a borrower of loan opts for MCLR, switching back to base rate system is not allowed.

 

#Loans covered by government schemes, where banks have to charge interest rates as per the scheme need not be linked to MCLR. Personal loans, auto loans also are exempted.

 

#Fixed rate loans up to a tenure of 3 years can be brought under MCLR system.