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

Marginal-cost of funds based lending rate (MCLR) and External benchmark lending rate (EBLR) are rate regimes to which various loans are linked in India. These are, in fact, new rate regimes that have replaced the earlier base rate regime.

Before we go on to discuss the main question, let’s discuss what are MCLR and EBLR rate regimes briefly:

MCLR rate regime: Introduced on April 1, 2016, the MCLR regime replaced the earlier base rate system and was aimed at improving transparency and improving the transmission of policy rate to end borrowers. Decided by the RBI, the MCLR rate is based on the bank’s marginal cost of funds, and as per the RBI mandate, lenders are not allowed to lend funds below this rate.

EBLR rate: In this rate regime, banks peg consumer loans to external benchmarks like the RBI’s repo rate etc. This is the newest benchmark introduced by the apex banker in October 2019.

The RBI guidelines mandate linking of most floating-rate loans to the EBLR, which is linked to policy rates such as the RBI’s repo rate.

EBLR, in its entirety, includes the external benchmark ( which automatically adjusts as per the RBI’s repo rate), spread, i.e., the bank’s costs and credit risk assessed as per the borrower's risk profile.

Even though banks are mandated to come up with the MCLR rate every month, the loan reset for customers does not happen spontaneously. In fact, even after the RBI makes the change in policy rate, and supposing the MCLR change is made in June, a person whose loan reset date falls in December will see the transmission only in December. This suggests that rate transmission under the MCLR regime is delayed.

Typically, for borrowers, the rates are reset every six months or annually as per the terms of the loan agreement.

As per RBI’s guidelines, banks are mandated to reset the EBLR rate every quarter. Hence, the rate transmission here is quick and mostly is effected within one month of any policy shift. So, likewise, any external-rate changes, such as the repo rate change is quickly adjusted in the borrowers' floating-rate loans.

Key takeaways for borrowers

EBLR is a better rate regime considering transparency and faster transmission. Nonetheless, in the rising interest rate regime, the MCLR-rate regime proves to be better as the time duration between two reset dates of 6 months to 1 year provides a cushion from any immediate rate hike.