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Home / Money / Personal Finance /  Why a hike in MCLR by banks may not affect you
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Bank borrowers would have heaved a sigh of relief when the Reserve Bank of India recently left the repo rate unchanged. But the relief seems to have been short-lived. 

Several banks such as the State Bank of India, Bank of Baroda and Axis Bank recently hiked their marginal cost of funds-based lending rate (MCLR) by 5-10 basis points (bps) across tenures. 

Borrowers with an existing MCLR-linked floating rate loan with these banks will see a revision in their loan rate on the re-set date. 

Adhil Shetty, CEO, Bankbazaar.com explains this with an example. “If you have a loan linked to a two-year MCLR and your loan was last reset in February, then your next reset will be only in February 2024." In case of retail customers, only those with loans issued prior to October 2019 will get impacted. 

No impact

All existing floating rate bank loans are linked to the MCLR or the external benchmark-based lending rate (EBLR) or the base rate. 

Following an RBI directive in 2019, all retail loans (such as home, car, personal and education loans) issued since 1 October 2019 have, however, had to be linked only to the EBLR.

The MCLR was introduced in April 2016 to replace an earlier base rate system. 

Each bank calculates its MCLR by taking into account factors such as its incremental cost of raising funds (say, via deposits) and operating expenses, among others. 

“Typically, an increase in the interest rate automatically translates into a longer tenor. However, you can request the bank for a higher EMI to offset the tenor increase," Shetty adds.

Retail borrowers who have taken floating rate loans only after 30 September 2019 will be on EBLR loans. Such borrowers will, therefore, remain unaffected even if their bank has hiked its MCLR. 

EBLR loans have to be linked to an external benchmark, which is the repo rate (the rate at which the RBI lends to banks) in case of retail loans.  A bank’s EBLR is repo rate plus a spread plus a credit risk premium.

What’s next

With rising concern over inflation, a repo rate hike by the RBI seems imminent. Once that happens, interest rates for EBLR loans should move up. 

“The repo rate hike will lead to a general rise in rates in the economy and will require banks to increase their deposit rates. As the incremental cost of deposits is an input for determining the MCLR, there will be an indirect impact on MCLR too," says Anil Gupta, vice president & co-group head, financial sector ratings, ICRA.

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