Aakash YadavIf you have a home loan or personal loan, you must have seen terms like MCLR, EBLR or RLLR in your loan documents or bank messages. Most people find these terms confusing. The good news is that the basic idea behind them is actually simple once someone explains it properly.
This article will walk you through everything step by step — what MCLR means, how banks calculate it, how it is different from the repo rate and EBLR, and most importantly, how it affects your EMI. By the end, you will be able to look at your own loan and clearly understand which system it follows.
Table of Contents
What is MCLR in Simple Words?
MCLR is the minimum interest rate below which a bank is not allowed to lend in most cases. Think of it as the floor rate set by the bank itself. The official methodology and FAQs are available on the RBI’s page explaining the Marginal Cost of Funds based Lending Rate (MCLR).
Full Form and Meaning of MCLR
MCLR stands for Marginal Cost of Funds based Lending Rate. In plain language, it is the lowest rate at which a bank is ready to lend money to customers, calculated mainly on the basis of the cost the bank itself incurs to get funds.
Why Banks Use MCLR for Lending Rates
Before MCLR, banks used an older system called Base Rate. The RBI introduced MCLR in 2016 so that changes in the central bank’s policy rates and the bank’s own cost of funds would get reflected in loan rates more quickly and more transparently. Under this system, every bank has to declare its MCLR for different tenures (overnight, one month, three months, six months, one year, etc.).
How Do Banks Calculate MCLR?
Banks do not pick the MCLR number randomly. They follow a set formula that takes into account several costs.
Main Components of MCLR
The main components are:
- Marginal cost of funds (the cost the bank pays on new deposits and borrowings)
- Operating costs of the bank
- A negative carry on the cash reserve ratio (the money banks have to keep with RBI without earning interest)
- Tenure premium (extra charge for longer-period loans)
When any of these components change, the MCLR can move up or down.
Why MCLR Changes from Time to Time
MCLR changes when the bank’s cost of funds changes. If the RBI raises the repo rate, banks eventually pay more for money and their MCLR usually rises. If deposit rates fall or the bank becomes more efficient, MCLR can come down. Most banks review and publish revised MCLR every month.
MCLR vs EBLR vs RLLR vs Repo Rate – Clear Difference
This is the part that confuses most borrowers. Let us clear it one by one.
What is Repo Rate
The repo rate is the interest rate at which the Reserve Bank of India lends money to commercial banks for the short term. It is the RBI’s main tool to control inflation and liquidity in the system. When people say “RBI has hiked interest rates,” they usually mean the repo rate has gone up.
What is EBLR (External Benchmark Lending Rate)
EBLR means the loan interest rate is linked to an external benchmark. The most common external benchmarks are the RBI repo rate or the 3-month/6-month Treasury Bill rate. Under the EBLR system, when the external benchmark changes, the bank has to reset the loan interest rate within a fixed period (usually one to three months).
What is RLLR (Repo Linked Lending Rate)
RLLR is simply a type of EBLR where the external benchmark is specifically the RBI repo rate. Many banks use the term RLLR for their repo-linked home loans. So RLLR is not a completely different system — it is EBLR with the repo rate as the benchmark.
Side-by-Side Comparison Table
| Feature | MCLR | EBLR / RLLR | Repo Rate |
|---|---|---|---|
| Who sets it | The bank itself | Linked to external benchmark | Reserve Bank of India |
| Main basis | Bank’s cost of funds | RBI repo rate or T-Bill rate | RBI’s policy decision |
| Speed of transmission | Slower | Faster | Instant for the system |
| Reset frequency | Usually yearly or as per loan | Mandatory periodic reset | Changes only when RBI decides |
| Used for new loans today | Mostly older loans | Most new floating rate loans | Benchmark for EBLR/RLLR |
How MCLR Affects Your Home Loan and Personal Loan EMI
If your loan is linked to MCLR, any change in the bank’s MCLR can change the interest rate you pay — but not immediately. A current real-world illustration is SBI’s recent revision. See the detailed impact in our analysis of SBI raising lending rates from 15 October and how much your home loan EMI will increase.
Impact on Floating Rate Loans
In a floating rate loan linked to MCLR, your final interest rate is usually MCLR + a fixed spread (also called margin). When the MCLR goes up, your interest rate goes up by the same amount. When MCLR comes down, your rate comes down, provided the bank passes on the full benefit.
Why Your EMI Can Change When MCLR Changes
Banks can adjust either the EMI or the tenure when the interest rate changes. Many banks prefer to keep the EMI same and extend the tenure when rates rise. Others increase the EMI. The exact method depends on your loan agreement and the bank’s policy.
When Does Your Loan Interest Rate Reset Under MCLR?
This is an important practical point.
Reset Period in MCLR-Linked Loans
Most MCLR-linked loans have a reset period of one year. That means even if the bank raises MCLR every month, your loan interest rate will change only once a year on the reset date. Some loans may have shorter reset periods, but one year is the most common.
Difference in Reset Timing Between MCLR and EBLR Loans
EBLR or RLLR linked loans are reset much more frequently — usually every one or three months. This is why changes in the RBI repo rate reach EBLR borrowers faster than MCLR borrowers.
Simple Example – How MCLR Change Impacts Your EMI
Let us take a realistic example so the impact becomes clear.
Example of a ₹50 Lakh Home Loan
Suppose you have a home loan of ₹50 lakh with 20 years remaining. Your current interest rate is 8.50% (MCLR 8.00% + spread 0.50%). The approximate EMI is ₹43,390.
Calculation of EMI Before and After MCLR Hike
Now assume the bank raises the one-year MCLR by 0.25% and your loan is due for reset. Your new interest rate becomes 8.75%. The new EMI rises to approximately ₹44,100. The difference is about ₹710 per month.
If the bank chooses to keep the EMI unchanged, the loan tenure will increase instead. Either way, you end up paying more over the life of the loan.
Which is Better for Borrowers – MCLR or EBLR Linked Loan?
For most new borrowers today, EBLR or RLLR linked loans are considered better because of faster and more transparent transmission of rate changes.
Advantages of EBLR / RLLR Linked Loans
- Rate changes happen more quickly when RBI moves the repo rate
- The link to an external benchmark is transparent
- Borrowers benefit faster when rates fall
Situations Where MCLR Loans Still Exist
Many older home loans (especially those taken before 2019–20) are still linked to MCLR. Banks stopped offering pure MCLR-linked home loans for new customers after the RBI made external benchmarking mandatory for certain categories of loans. Some personal loans or special products may still use MCLR.
What Should Existing Borrowers Check in Their Loan Account
If you already have a loan, you should know exactly which system you are on.
How to Identify If Your Loan is MCLR or EBLR Linked
Look at your original sanction letter or the latest loan statement. It will usually mention “MCLR linked”, “EBLR linked” or “RLLR linked”. You can also see it in the interest rate section of your net banking or mobile app. If you still cannot find it, call the bank’s customer care or your relationship manager and ask directly.
How to Find Your Next Reset Date
The reset date is usually mentioned in the sanction letter or loan schedule. In many banking apps it appears under loan details as “Next Interest Reset Date” or “Rate Review Date”. Knowing this date tells you when a change in MCLR or EBLR will actually start affecting your EMI.
Frequently Asked Questions on MCLR
What is the full form of MCLR?
MCLR stands for Marginal Cost of Funds based Lending Rate.
How is MCLR different from repo rate?
Repo rate is set by the RBI and is the rate at which banks borrow from the central bank. MCLR is set by each bank and is the minimum rate at which that bank is willing to lend. Repo rate is one of the factors that influences MCLR, but they are not the same thing.
Does MCLR change every month?
Most banks review and publish MCLR every month. However, your individual loan rate changes only on the reset date mentioned in your loan agreement (often once a year).
Can I switch my MCLR loan to EBLR?
Many banks allow existing MCLR borrowers to switch to an EBLR or RLLR linked rate. The switch usually involves a small fee and is subject to the bank’s current policy. It is worth checking with your bank if the switch is beneficial in your case.
Why do banks still use MCLR for some loans?
MCLR is still used for certain older loans and some specific loan products. For most new floating rate retail loans, especially home loans, banks have shifted to external benchmarks as directed by the RBI.
Summary – MCLR Explained in One Place
MCLR is the minimum lending rate calculated by each bank on the basis of its own cost of funds. It was the main system for floating rate loans for several years. Today, most new home loans are linked to external benchmarks such as EBLR or RLLR, which are tied more directly to the RBI repo rate and transmit rate changes faster.
If your loan is still on MCLR, rate changes reach you more slowly and usually only on the annual reset date. If it is on EBLR or RLLR, changes happen more frequently and more transparently.
The most useful thing you can do right now is check your loan documents or banking app and identify whether your loan is MCLR-linked or EBLR/RLLR-linked, and note the next reset date. Once you know that, you will understand exactly how future rate changes will affect your EMI.
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