The Link Between MCLR and Credit Score

The Credit Score is closely linked to the Marginal Cost of Funding-Based Lending Rate (MCLR). The loan rate paid by banks is MCLR, and the credit score is a numerical representation that indicates your creditworthiness. To understand the relation between the Credit Score and the MCLR, let us first understand in depth both of these words.


The MCLR stands for Marginal Cost of Funding-Based Lending Rate. It is the minimum interest rate at which a bank lends under which it is not authorized to lend to the bank. It was developed by the RBI in 2016 to replace the old Base Rate Interest on Loans scheme. All previous base rate related loans and credit exposures have been migrated to the new MCLR regime with the establishment of the MCLR scheme. The RBI has set up a facility starting on 1 April 2018 to connect the base rate for loans issued by banks to the MCLR system. Borrowers who have lent at the base rate will benefit from this.

The MCLR is derived from the following factors:

  • The marginal cost of funds.
  • Tenor premium (which pays off the risk on long-term loans).
  • Operating expenses.
  • Cost of Cash Reserve Ratio (CRR).

From the estimated cost of funds and the minimum rate of return, the standard base rate structure is extracted. The Repo Rate set by the RBI represents the MCLR. A Repo Rate is the rate at which commercial banks, when they run short of funds, borrow money from the RBI. This implies that the lower the repo rate, the lower the interest rate at which a loan to borrowers is floated by commercial banks. MCLR therefore assists in passing on to the banking customer any adjustments in policy rates set by the RBI.

After the announcement that all base rate related loans will be linked to the MCLR regime after April 1, 2018. All the loans will be based on the post-March 2018 MCLR framework. The MCLR applicable to any form of loan must, as directed by the RBI, be at a 1-year or lower tenure rate. Banks have either a six-month or a regular 1-year MCLR option to choose from. For any of the loans offered, banks also have the option to add a small percentage of interest to the MCLR. This means that the interest rate of the loan will be reset on an annual basis as per the MCLR benchmark, given that it is a floating rate loan or a fixed loan with a period of less than 3 years.

Let us illustrate this with a simple example. Bank A has set 9.2 percent for its 1-year MCLR. You have agreed to take out a personal loan at a floating rate of interest in June 2020. A small percentage of interest, equivalent to 25 basis points, is decided by the bank. Thus, the final interest rate provided to you by Bank A will be 9.45%. If the MCLR slumps to 9.1 percent next financial year, taking this into account, the interest rate offered by Bank A will fall to 9.35 percent. 

Current borrowings will continue to rely on the base rate. Depending on the bank agreeing to it, existing customers could move to MCLR-based loans.


A CIBIL Score is a three-digit number ranging from 300 to 900 and produced by TransUnion CIBIL on the basis of the borrower’s repayment history as reported in their credit report. This score shows the individual’s creditworthiness, i.e. their ability to repay the borrowed credit. Any lender and credit card issuer assesses this before any credit product is provided to you. This score essentially helps decide whether or not you are a good borrower.


The MCLR and Credit Score do not have either a clear or direct relationship. But your credit ratings influence your chances of securing a loan at the interest rate dependent on the MCLR. You do not need to worry about loan rejection if you have a high credit score. But if you have a poor credit score, banks are more likely to refuse your loan and you will be paying a very high rate of interest even if you get the loan. Therefore, it is suggested to keep the scores at the top of the MCLR scheme to get the loan.

In a nutshell, these two aspects are not related directly, yet your credit score holds great importance in your financial life. It shows whether or not you are entitled to get a loan at the interest rate depending on the MCLR.