What is the difference between base rate and MCLR?

Base rate and Marginal Cost of Funds based Lending Rate (MCLR) are benchmarks used by banks to set lending rates.

• Base rate: Calculated based on the average cost of funds, operating expenses, and minimum profit margin. It is reviewed quarterly.
• MCLR: Based on the marginal or incremental cost of funds, deposit rates, repo rates, and tenor premium. It is more responsive to changes in policy rates and reviewed monthly.

MCLR was introduced to make lending rates more transparent and responsive to market conditions. All new loans since April 2016 are linked to MCLR, while older loans may still be based on the base rate.