To what is your loan linked to EBLR or MCLR? The type of loan will tell whether the EMI will reduce immediately after the Repo Rate Cut!

Reserve Bank of India (RBI) has recently made a bumper cut in the repo rate. Last Friday, the Reserve Bank cut the repo rate by 50bps, with this the interest rate has come down from 6% to 5.5%. Everyone knows that after the cut in the repo rate, your loans will also become cheaper. But if you want to know when your loans will become cheaper and when its EMI will reduce, then you will first have to understand the type of your loan. To what is your loan linked to EBLR or MCLR? This has to be understood. If you know this, then you will also know whether the EMI of your loan will reduce immediately or not.

MCLR i.e. Marginal Cost of Funds based Lending Rate is a method decided by the Reserve Bank of India which is used by commercial banks to decide the loan interest rate. This trend came into practice in India in the year 2016. This has made it easier for customers to take loans. MCLR is the minimum rate below which no bank can give loans to customers. Actually, when you take a loan from a bank, the minimum rate of interest charged by the bank is called the base rate. Now banks are using MCLR in place of this base rate.

MCLR was implemented with the aim of improving the transmission of policy rates of lending rates of banks and making the process of determining interest rates of all banks transparent. Loans like home loans have become cheaper since the implementation of MCLR. MCLR is calculated on the basis of Marginal Cost of Funds, Period Premium, Operating Expenses and the cost of maintaining Cash Reserves Ratio. Later, loans are given on the basis of this calculation. It is cheaper than the base rate. It is mandatory for banks to declare their overnight, one month, three month, six month, one year and two year MCLR every month.

After the repo rate is cut by RBI, loans linked to MCLR do not become cheaper immediately, it takes some time. In the MCLR system, banks usually keep home loans linked to 6 month or one year MCLR. Therefore, the rates of such home loans change only in the frequency of 6 months or 1 year. In such a situation, the effect of fluctuations in the repo rate during this period is not seen quickly on the rate of MCLR loan. Customers have to wait for the EMI of the loan to be reduced. Therefore, the EBLR system was introduced in October 2019.

EBLR means External Benchmark Lending Rate. It is directly linked to external benchmarks like repo rate. The operating cost of banks has no role in this. In such a situation, as soon as the repo rate decreases, the loans linked to the EBLR system also start getting cheaper immediately and your EMI reduces quickly. It is much more flexible than MCLR.

You can check your loan statement to find out whether your loan is linked to EBLR (External Benchmark Lending Rate) or MCLR (Marginal Cost of Funds Lending Rate). In the statement, there will be information about the type of interest rate of your loan. Apart from this, you can contact the customer care of your bank and ask whether your loan is linked to EBLR or MCLR.

If a customer has taken a home loan based on MCLR and wants to convert it into an EBLR based home loan, then many banks are providing this facility. To convert, the customer will have to pay a one-time charge. This charge may vary in different banks.