Why does it sometimes take months after an RBI rate cut for borrowers to see their home loan EMI come down? The answer, at least for older loans, has a lot to do with MCLR — Marginal Cost of Funds Based Lending Rate. Understanding how MCLR works explains why the transmission of central bank policy to your actual loan rate is never instantaneous.
MCLR is the minimum rate below which a bank cannot lend to customers. Every bank calculates its own MCLR — it’s not a common rate set by the RBI. It’s based on that bank’s own cost of raising money at the margin, and it changes as that cost changes. The RBI introduced MCLR in April 2016 to replace the older, less transparent Base Rate system.
Why MCLR Transmission Is Slow
Suppose the RBI cuts the repo rate by 0.50% today. Banks’ cost of funds gradually reduces as they reprice their deposits over the coming months — new FDs are opened at lower rates, old ones mature and roll over at new rates. This gradual decline feeds into MCLR, which the bank revises monthly. So MCLR might fall by 0.25% over the next two months.
But even after MCLR falls, borrowers don’t immediately benefit. Their loan rate only resets on the annual reset date specified in their loan agreement. If you took a loan in January 2024 with an annual reset, and MCLR falls in March 2024, your rate doesn’t change until January 2025. That’s a 10-month lag on a 0.5% RBI rate cut.
This sluggishness is exactly why the RBI replaced MCLR with EBLR (External Benchmark Lending Rate) for new loans in October 2019. EBLR is directly linked to the repo rate — when RBI cuts rates, EBLR-linked loan rates adjust within one quarter at most. The transmission is dramatically faster.
But millions of existing loans from before October 2019 are still on MCLR. If your home loan was taken in, say, 2017, you’re still operating on MCLR linkage unless you’ve specifically refinanced to EBLR. Many borrowers haven’t — sometimes out of inertia, sometimes because the switching cost (processing fee, legal charges) makes it not worthwhile for small rate differences.
Frequently Asked Questions
Q: What is the full form of MCLR?
A: MCLR stands for Marginal Cost of Funds Based Lending Rate — the minimum interest rate below which a bank cannot lend, calculated based on that bank’s own cost of raising funds at the margin. Introduced by RBI in 2016, it replaced the earlier Base Rate.
Q: Is MCLR still used in 2026?
A: Yes — for loans taken before October 2019 that haven’t been switched to EBLR. All new floating rate retail and MSME loans must now be benchmarked to EBLR (repo rate or T-bill rate). Banks still publish MCLR for all tenors since corporate loans and some other products may still reference it.
Q: How is MCLR different from EBLR?
A: MCLR is set internally by each bank based on its cost of funds — rate transmission is slow. EBLR is linked to an external benchmark like the RBI’s repo rate — changes immediately when the repo rate changes, giving borrowers faster benefit when rates fall (and faster increases when they rise).
Q: Should I switch my MCLR loan to EBLR?
A: It depends on the rate differential, the switching cost (usually Rs.5,000–Rs.10,000 plus processing charges), and your remaining loan tenure. If your remaining tenure is long and the rate difference is significant, switching usually makes sense. For short remaining tenures, the switching cost may outweigh the benefit. Get your bank to calculate the comparison before deciding.
