MCLR (Marginal Cost of Lending Rate) is the benchmark lending rate below which banks are not supposed to lend. As against previous benchmark rates which were based upon average cost of funds, MCLR is based upon cost of incremental funds. As a result it is determined at a monthly frequency.

In its bimonthly monetary policy announced on 25 June, RBI increased Repo Rate (RoI at which RBI lends to banks) by 0.25% ( also symbolised as 25 bps) to 6.25%. As happens almost always, this resulted first in the increase in deposit rates and subsequently in MCLR by around 0.10% (also symbolised as 10 bps) by leading public sector banks (PSBs) and Private Sector Banks.

This increase had an immediate impact upon personal loans including home loans which had an immediate impact of 10-20 bps. This is a signal for higher inflation. Increasing global petroleum prices are contributing to rate increase in India.

According to Deepak Parekh, chairman, HDFC, the interest on Home Loans can be reduced if these lenders can be allowed to finance land transactions. NBFCs and PEs are allowed to do these transactions. Secondly, he said that shifting of outstanding loans by the customers from one lender to another without prepayment penalty is creating unneeded imbalances and competition. He is right. Lenders are busier focusing upon existing clients rather than creating new business opportunities.

Same is the case with vehicle loans and credit card outstanding balance take over.