The Reserve Bank of India establishes the MCLR, or marginal cost of funds-based lending rate, as an internal reference rate for banks. It is aimed to facilitate the calculation of the minimal interest rate for various types of loans that banks offer. MCLR, to put it simply, is the lowest rate at which banks are permitted to give loans to their customers.

The base rate system, which had been in use up until that point, was basically replaced by the RBI through the introduction of MCLR rates in 2016. Its principal goal was to preserve equilibrium between the interests of the banking sector on the one hand and the transfer of interest rate advantages from the RBI’s monetary policy to borrowers on the other hand through the use of a benchmark rate that can assure profitability.