Interest Rate Rise: How the MCLR Rise Affects Retail Borrowers

With the country’s largest lender, State Bank of India, increasing its marginal cost of funds-based lending rate (MCLR) by 10 basis points (bps) to 7.1% after three years, and d While other lenders like Axis Bank, Bank of Baroda and Kotak Mahindra Bank are also increasing their MCLR rate by 5 basis points, existing retail borrowers whose loans are linked to the MCLR will now be required to pay higher monthly equivalent payments (EMI) for their home loan when the reset date arrives. Even car and personal loans will become more expensive.

The reversal in the rate cycle will affect borrowers whose loans are linked to an external benchmark like the repo rate or the three or six month Treasury bill rate once the Reserve Bank of India raises the policy repo rate, which could be very soon. In fact, RBI, in its April 8 monetary policy review, signaled that its focus is now shifting from boosting growth to containing inflation. Since then, the yield on benchmark 10-year government securities has remained above 7%. Kotak Institutional Equities expects the first repo rate hike of 25 basis points in June policy (the first expectation was in August) and a cumulative hike of 100 basis points in fiscal year 2023.

Impact of the MCLR increase on retail loans
Assuming your MCLR linked home loan for 20 years is priced at 7.35%, your interest per lakh is Rs 91,147 and your EMI is Rs 796. A 10 basis point increase in MCLR will increase your EMI at Rs 803 and loan interest at Rs 92,609. Rate changes are gradual. There could be several hikes this year. If so, your interest rate will increase by well over 10 basis points.

Adhil Shetty, CEO of, explains that if the borrower has an MCLR loan with a substantial balance, he should check if it is beneficial for him to stay on the loan. “Your rate hike date may still be several months away and you can still enjoy your current rate. Second, check the premium you’re paying on a repo loan. Repo loans are cheaper today. More than 20 lenders have their lowest rates at less than 7%.If the difference is substantial – say 50 basis points – it makes sense to refinance.You can ask your bank for a repo conversion or switch to another lender offering you better conditions,” he said.

MCLR-linked loans
The MCLR, introduced in 2016 by the central bank, is determined by the marginal cost of funds, including the deposit rate and the repo rate. It is an internal benchmark that determines the interest rate on loans based on the cash reserve ratio, loan term and operating costs. Any change in the repo rate will also change the marginal cost and the MCLR would also change. Previously, the central bank introduced the base rate system to ensure that banks did not lend below a certain rate and that changes in the policy rate were actually passed on to the borrower.

Prepayment, balance transfer loans
Experts say that with rising rates, it is better to make part of the prepayment of home loans to reduce the interest burden. Banks do not charge partial or full repayment of the outstanding principal on variable rate loans if it is made from equity. In fact, a partial payment in the early years of the loan term will help reduce the overall interest payment. With frequent prepayments when interest rates rise, you not only reduce the outstanding principal, but also the amount of interest.

After reimbursement, keep the EMI at the same level or increase it. A lower term will reduce the long-term interest payment. If you feel that the bank is charging a higher interest rate, you can opt to transfer the outstanding loan balance to another bank at a lower interest rate. However, check the costs associated with the balance transfer before deciding.

heavier burden
Existing MCLR-linked retail mortgages will now have higher EMIs when the reset date arrives.
Even car and personal loans will become more expensive.
You can opt to transfer the outstanding loan balance to another bank, but check the associated fees first.
Repo loans are cheaper today as many banks have interest rates below 7%.

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