MCLR vs. EBLR: How RBI Repo Rate Changes Affect Your EMI
Understand the structural differences between MCLR and EBLR bank loan pricing systems in India and why EBLR is generally preferred.
If you have a floating-rate home or commercial loan in India, the interest rate is tied to a specific benchmark. Since October 2019, RBI mandated all new floating-rate retail loans to be linked to an External Benchmark (mostly the Repo Rate). Older loans may still be tied to MCLR.
1. What is MCLR (Marginal Cost of Funds Based Lending Rate)?
MCLR is an internal benchmark pricing system. Banks determine their MCLR based on their internal cost of funds, cost of maintaining CRR/SLR, and operating costs.
- Slow Transmission: If the RBI cuts repo rates, banks take several months to reduce their MCLR.
- Reset Clauses: MCLR loans typically reset only once a year. Your interest rate remains fixed between resets.
2. What is EBLR (External Benchmark Lending Rate)?
EBLR links the loan rate directly to an external benchmark, which is the RBI Repo Rate for almost all banks in India.
- Faster Transmission: Changes in the benchmark must be passed on through the loan rate, with the interest rate reset at least once every three months.
- Transparency: Since the benchmark is external to the bank, the bank cannot arbitrarily change its margins or keep rates high when market rates drop.
3. Key Differences
| Feature | MCLR Loans | EBLR (Repo Linked) |
|---|---|---|
| Transmission speed | Slow (internal variables) | Fast (automatic Repo updates) |
| Reset Period | Usually 1 Year | 3 Months |
| Transparency | Low (controlled by banks) | High (RBI Repo controlled) |
4. Switch to EBLR for Savings
If you have an older home loan tied to MCLR, you can write to your bank to switch your loan linkage to Repo-Linked EBLR. Banks are allowed to charge a small nominal administrative switching fee, but it is highly recommended to do so if interest rates are on a downward trend.
5. How the Rate Is Built: Benchmark Plus Spread
An EBLR loan rate is simply the external benchmark plus a spread chosen by the bank. For example, if the repo rate is 6.00% and the bank's spread for your profile is 2.75%, your rate is 8.75%. When the repo rate falls by 0.25%, your rate falls by 0.25% as well, because the spread is not supposed to change. The credit-risk portion of the spread can only be revised under conditions set out in the loan agreement, such as a deterioration in your credit profile. Banks may, however, change the spread for new borrowers at any time, which is why long-standing customers sometimes pay more than new ones.
6. What a Rate Change Means for Your EMI
When the rate on a floating loan changes, lenders usually either adjust your EMI or adjust your tenure. On a ₹50,00,000 loan over 20 years, a rate of 8.5% gives an EMI of about ₹43,391. If the rate rises to 9.5%, the EMI for the same tenure becomes about ₹46,607, and if it rises to 10.5% it becomes about ₹49,919. If the lender keeps your EMI unchanged instead, the extra interest silently lengthens the tenure, so check your statement after every reset. Entering the new rate into our calculator shows the effect immediately.
7. How to Check Which Benchmark Your Loan Uses
- Look at your sanction letter or the latest loan statement; it states the benchmark (MCLR, Repo rate, T-Bill rate) and the spread.
- Ask the bank for the reset date and the revised rate schedule.
- Compare your current rate with the rate the bank offers new borrowers today. If new customers are getting a noticeably lower spread, negotiate a spread reduction or consider transferring the loan to another lender.