Banks Reset MCLR and EBLR Rates on Different Schedules

When do banks reset the MCLR and EBLR rates for borrowers?

Banks in India follow distinct schedules to reset the Marginal Cost of Funds Lending Rate (MCLR) and the External Benchmark Lending Rate (EBLR) for borrowers. The MCLR system, introduced on April 1, 2016, replaced the earlier base rate system to enhance transparency and improve the transmission of policy rates to consumers.

EBLR, the newer benchmark introduced in October 2019, links loan rates directly to external benchmarks such as the Reserve Bank of India’s (RBI) repo rate. This linkage allows for quicker adjustments in response to policy changes.

How MCLR Resets Affect Borrowers

Although banks must publish the MCLR monthly, borrowers experience rate resets only on their loan’s reset date, which typically occurs every six months or annually, depending on the loan agreement. This means that even if the RBI changes policy rates and banks adjust their MCLR accordingly, borrowers may see the impact only at their next reset date, causing a delay in rate transmission.

Faster Adjustments Under EBLR

Under RBI guidelines, banks are required to reset EBLR-linked loans quarterly. This schedule enables borrowers to benefit from faster transmission of policy rate changes, usually within a month of any adjustment in the RBI’s repo rate. The EBLR includes the external benchmark rate plus a spread reflecting the bank’s costs and the borrower’s credit risk.

Comparing MCLR and EBLR Regimes

While EBLR offers greater transparency and quicker rate changes, the MCLR system can provide borrowers some protection during rising interest rate periods due to its longer reset intervals. This cushion delays immediate rate hikes, potentially easing short-term repayment pressures.