MCLR is the minimum lending rate at which a bank is not authorised to lend.
Prior to MCLR, there existed the Base Rate Policy, which had some transparency issues and direct change of interest rate to Repo Rate (The rate at which RBI lends to commercial banks).
The MCLR is a bank’s internal reference rate used to calculate how much interest they may levy on loans.
The MCLR policy allows banks to adjust their interest rates in relation to repo rates almost instantaneously.
The bank combines the MCLR by a “spread” (interest rate above and above the MCLR) and then applies an interest rate on your loans.
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