RBI proposes 3-month MCLR reset for loans: What could change for borrowers and their monthly EMIs

The Reserve Bank of India (RBI) has proposed a new methodology for calculating the Marginal Cost of Funds Based Lending Rate (MCLR), under which banks would use a three-month moving average of their marginal cost of domestic deposits and borrowings.

The proposal is part of the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, which seeks to bring greater consistency and transparency to the way regulated lenders determine interest rates on loans. The proposed directions are set to take effect from April 1, 2027, subject to the finalisation of the framework after stakeholder feedback.

How will RBI’s new three-month MCLR formula work?

Under the proposed framework, the marginal cost component of MCLR would be determined using the marginal cost of domestic deposits and borrowings over the preceding three months.

For each month, banks would calculate an annualised weighted average interest cost based on the volume of new domestic deposits and borrowings during that month. The three monthly figures would then be used to arrive at the moving average for the marginal cost component.

The RBI has also proposed that the data used for this calculation should be system-generated and independently verifiable. This would standardise the data used by banks to determine their marginal funding costs.

MCLR is an internal benchmark used by banks for pricing certain floating-rate loans. Under the existing framework, banks calculate their marginal cost of funds along with other prescribed components, including negative carry on account of cash reserve ratio, operating cost and tenor premium. The reset period for MCLR-linked loans is currently one year or lower.

The proposed methodology therefore changes the way the marginal cost component is measured, rather than simply changing the MCLR itself.

What changes for consumers under RBI’s new loan pricing rules?

The proposed framework also changes the reset frequency for MCLR-linked floating-rate loans. The RBI has proposed that the benchmark reset period should not exceed three months for such loans.

This is relevant because the existing framework permits MCLR-linked loans to have a reset period of up to one year. A shorter reset cycle would mean that changes in the applicable benchmark could be reflected in the loan rate more frequently.

The proposal also seeks to standardise how the spread over a benchmark is determined. For floating-rate loans, the interest rate would comprise the applicable benchmark plus a risk-based spread.

The spread would consist of a credit risk premium and one or more components such as operating cost, term premium and business strategy premium. The credit risk premium would have to remain positive.

The RBI has proposed that the credit risk premium should be revised only when there is a change in the borrower's credit profile, in accordance with the lender's policy and the loan agreement. This could give borrowers greater clarity on the circumstances in which the risk component of their loan rate can change.

It is important to note that not every floating-rate retail loan is linked to MCLR. Under the existing RBI framework, banks are required to link new floating-rate personal and retail loans and floating-rate loans to micro and small enterprises to specified external benchmarks.

What happens to existing loans under RBI’s proposed framework?

The proposed directions would not mean that all existing loans automatically shift to the new methodology on April 1, 2027.

The RBI has proposed a one-time mapping exercise under which existing loans linked to internal or external benchmarks would be migrated to the prescribed interest-rate framework by April 1, 2029.

For borrowers, the impact will therefore depend on the benchmark linked to their loan, the reset frequency specified in their loan agreement and the final rules issued by the RBI.

The proposed framework covers both fixed and floating-rate loans and also sets out provisions relating to benchmarks, spreads, rate resets and the treatment of existing loans.

The RBI's proposal is aimed at making the process of determining and revising lending rates more standardised and transparent. Since these are draft directions, the provisions could change before the framework is finalised and comes into effect on April 1, 2027.