Two Systems, One Goal — But Only One Truly Serves You
If you have ever wondered why your neighbour’s home loan rate dropped faster than yours despite both of you having loans with the same bank, the answer likely lies in three letters: EBLR versus MCLR. These two lending rate systems coexist in India’s banking landscape, and the one your loan is linked to can cost you lakhs over the loan tenure.
In this guide, we will demystify both systems, explain the history behind the shift from one to the other, and give you a clear recommendation on what to do if your loan is still stuck on the older system.
The Evolution of Lending Rates in India
Before we dive into MCLR and EBLR, it helps to understand the journey:
| Period | System | Key Feature |
|---|---|---|
| Before 2010 | BPLR (Benchmark Prime Lending Rate) | Banks set rates with minimal transparency |
| 2010-2016 | Base Rate | RBI introduced formula-based rate setting |
| 2016-2019 | MCLR | More granular cost-based calculation |
| 2019-Present | EBLR | Linked to external benchmark (repo rate) |
Each transition was driven by the same problem: banks were not passing on RBI repo rate cuts to borrowers quickly or fully enough. The EBLR system was the RBI’s definitive solution.
What Is MCLR?
MCLR stands for Marginal Cost of Funds Based Lending Rate. It was introduced by the RBI on April 1, 2016, replacing the earlier Base Rate system. The idea was to make bank lending rates more responsive to changes in the RBI’s policy rate.
How MCLR Is Calculated
Banks calculate MCLR based on four components:
- Marginal cost of funds (92% of MCLR): The cost the bank incurs to raise an additional rupee of funding, considering both deposits and borrowings
- Negative carry on CRR (Cash Reserve Ratio): Banks must keep 4.5% of their deposits with the RBI at zero interest, which has a cost
- Operating costs: Costs of running the lending operations
- Tenor premium: An additional charge based on the loan tenure (longer tenure = higher premium)
Your loan rate under MCLR = MCLR + Spread
For example:
- 1-year MCLR: 8.50%
- Bank’s spread: 0.10%
- Your loan rate: 8.60%
MCLR Reset Periods
Banks publish MCLR rates for different tenors: overnight, 1 month, 3 months, 6 months, and 1 year. Most home loans are linked to the 1-year MCLR, which means your rate resets once every 12 months.
The problem: If the repo rate drops in January and your reset date is in December, you wait 11 months to get the benefit. During the 2019-2021 period when the RBI cut rates by 250 basis points, many MCLR borrowers received only 100-150 bps of benefit due to delayed transmission.
What Is EBLR?
EBLR stands for External Benchmark Lending Rate. The RBI mandated from October 1, 2019, that all new floating-rate retail loans from banks must be linked to one of four external benchmarks:
- RBI Repo Rate (chosen by most banks)
- 3-month Treasury Bill yield
- 6-month Treasury Bill yield
- Any other benchmark published by Financial Benchmarks India Private Ltd (FBIL)
In practice, almost every major bank in India — SBI, HDFC Bank, ICICI Bank, Axis Bank, and others — has chosen the repo rate as their external benchmark.
How EBLR Is Calculated
The formula is straightforward:
Your Loan Rate = Repo Rate + Bank’s Spread + Risk Premium
For example:
- Repo rate: 6.50%
- Bank’s spread: 1.75% (fixed at loan sanction)
- Risk premium: 0.25% (based on your credit score and profile)
- Your loan rate: 8.50%
EBLR Reset Periods
Under RBI guidelines, EBLR-linked loans must reset at least once every three months (quarterly). This is a massive improvement over the annual reset under MCLR.
The advantage: When the RBI cuts the repo rate in January, your rate adjusts by March at the latest. No more waiting 11 months.
MCLR vs EBLR — Head-to-Head Comparison
| Feature | MCLR | EBLR |
|---|---|---|
| Benchmark | Internal (bank’s own calculation) | External (RBI repo rate) |
| Transparency | Low — formula is complex and bank-specific | High — repo rate is publicly available |
| Reset period | Typically 6 months or 1 year | Minimum every 3 months |
| Rate transmission | Slow and incomplete | Fast and complete |
| Bank’s discretion | Significant — bank decides how to calculate marginal cost | Minimal — spread is fixed at sanction |
| Spread changes | Bank can revise periodically | Fixed at loan sanction (unless credit risk changes) |
| Typical home loan rate (Jan 2025) | 8.70-9.50% | 8.40-8.75% |
| Available for new loans | No (discontinued for new loans from Oct 2019) | Yes — the current standard |
Why MCLR Borrowers Got a Raw Deal
During the COVID-era rate cuts (2020-2021), the RBI reduced the repo rate from 5.15% to 4.00% — a cumulative reduction of 115 basis points. Here is how it played out for borrowers:
EBLR Borrowers
- Received the full 1.15% reduction
- Rate adjusted automatically within 3 months of each cut
- A Rs. 50 lakh, 20-year loan saw EMI drop by approximately Rs. 3,500/month
MCLR Borrowers
- Received only 0.60-0.80% of the 1.15% cut
- Many waited 6-12 months for each partial adjustment
- The same Rs. 50 lakh loan saw EMI drop by only Rs. 1,800-2,200/month
The gap: MCLR borrowers effectively subsidised their bank’s profitability by receiving less rate relief during the biggest rate-cutting cycle in Indian history. This is precisely why the RBI pushed for the EBLR system.
Should You Switch from MCLR to EBLR?
If your existing loan is linked to MCLR, switching to EBLR is almost always beneficial. Here is the analysis:
When Switching Makes Sense (Almost Always)
- Your MCLR-linked rate is 0.30% or more above what EBLR borrowers are paying at the same bank
- You have more than 5 years remaining on your loan
- The expected rate environment is stable or declining (as in 2025)
- Your bank offers the conversion at a reasonable fee (Rs. 0-5,000)
When Switching May Not Be Worth It
- Your remaining loan tenure is very short (under 2-3 years)
- Your MCLR rate, after all resets, is already competitive with EBLR rates
- The conversion fee is unusually high (some banks charge up to 0.50% of outstanding)
How to Switch
- Contact your bank: Visit the branch or call the customer service helpline
- Request MCLR-to-EBLR conversion: Banks are required to offer this option
- Pay the conversion fee: Typically Rs. 0 to Rs. 5,000 (some banks like SBI have offered free conversions)
- Sign the modified loan agreement: Your loan will now reference the repo rate as the benchmark
- New rate takes effect: Usually from the next billing cycle
If your bank is uncooperative or the conversion terms are unfavourable, consider a full loan balance transfer to another bank offering competitive EBLR rates.
EBLR and Different Loan Types
The EBLR mandate applies differently across loan categories:
Home Loans
Mandatory EBLR linkage for all new loans from banks since October 2019. If you are taking a new home loan, it will automatically be EBLR-linked. Housing Finance Companies (HFCs) may use different benchmarks but have moved towards external benchmarking as well.
Personal Loans
All new floating-rate personal loans from banks are EBLR-linked. However, many personal loans are offered on fixed rates, in which case the benchmark does not apply.
Car Loans
Most car loans are offered at fixed rates, so EBLR linkage is less relevant. However, if you opt for a floating-rate car loan, it will be EBLR-linked.
Business Loans
Floating-rate micro and small enterprise (MSME) loans from banks must be EBLR-linked. Larger corporate loans may have separate benchmark arrangements.
Loans from NBFCs and HFCs
Non-banking financial companies are not mandated to use EBLR, though many have voluntarily adopted external benchmarking. Housing finance companies like LIC Housing Finance and PNB Housing Finance have their own benchmark rate systems that may track the repo rate closely.
The RBI’s 2019 Mandate — Why It Matters
In September 2019, the RBI issued a landmark circular requiring all banks to link new floating-rate loans to external benchmarks effective October 1, 2019. The key provisions were:
- Mandatory external benchmark: Banks must use one of the four approved benchmarks
- Maximum reset period of 3 months: Ensuring faster transmission
- Fixed spread: The spread over the benchmark, determined at loan sanction, cannot be changed during the loan tenure (with limited exceptions)
- Transparency: Banks must publish the methodology and effective rates on their websites
- No dual pricing: Banks cannot offer both MCLR and EBLR to new borrowers; EBLR is the only option
This circular was a watershed moment in Indian banking regulation. It stripped banks of the discretion they had under MCLR and ensured that the RBI’s rate decisions would actually benefit borrowers in a timely manner.
For a comprehensive overview of how the RBI protects borrower interests, see our RBI guidelines guide.
What Happens to Your Spread Under EBLR?
The spread (the bank’s markup over the repo rate) is a critical component. Here is what you need to know:
At Loan Sanction
The spread is determined based on:
- Your CIBIL score and credit history
- Your income and employment stability
- The loan amount and LTV ratio (see our LTV ratio guide)
- Your relationship with the bank (existing customers may get a lower spread)
- The loan type (home loans have lower spreads than personal loans)
During the Loan Tenure
The RBI’s circular states that the spread cannot be increased during the loan tenure unless:
- There is a significant change in your credit risk profile (e.g., a major drop in credit score due to defaults)
- The specific terms in your loan agreement provide for such changes (which must be disclosed upfront)
This protection is enormous. Under MCLR, banks could revise spreads more easily, effectively negating rate cuts. Under EBLR, your spread is essentially locked in.
Can the Spread Be Reduced?
Yes. If you have improved your credit profile significantly (e.g., your credit score has improved), you can request the bank to reduce your spread. Banks are not obligated to do so, but many will consider it — especially if you threaten to transfer your loan to a competing bank.
The Future of Lending Rates in India
The RBI has signalled that it wants even greater transparency and competition in the lending market:
- Digital lending regulations now require full disclosure of interest rates, fees, and charges
- Loan comparison platforms (like UnLoan) help borrowers compare rates across lenders, creating competitive pressure
- Account aggregator framework allows borrowers to share financial data seamlessly, potentially enabling better rate offers
The EBLR system is likely here to stay and will continue to be refined. For borrowers, this is unequivocally a positive development — you get faster rate transmission, greater transparency, and stronger protection against arbitrary rate changes.
Frequently Asked Questions
Can I still get an MCLR-linked loan in 2025?
No. Since October 2019, all new floating-rate retail loans from banks must be linked to EBLR. If you took a loan before October 2019, your existing MCLR linkage continues unless you actively switch to EBLR.
My bank says switching from MCLR to EBLR will increase my rate. Is that true?
This is possible in certain cases. If the current repo rate plus the bank’s spread is higher than your existing MCLR-linked rate, switching could temporarily increase your rate. However, EBLR rates respond faster to future cuts, so you may benefit more over the remaining tenure. Ask your bank for a detailed comparison before deciding.
How do I find out if my loan is linked to MCLR or EBLR?
Check your loan agreement or your latest loan statement. The benchmark will be mentioned as either “MCLR” (with a tenor like “1-year MCLR”) or “Repo Rate / EBLR / RBI Repo Linked.” You can also call your bank’s helpline.
Do housing finance companies (HFCs) use EBLR?
The EBLR mandate technically applies to banks, not standalone HFCs. However, the NHB (National Housing Bank) has encouraged HFCs to adopt external benchmarks. Many large HFCs now benchmark their rates to repo or similar external rates, though the specific mechanism may differ.
What is the typical spread over repo rate for home loans?
As of March 2026, the spread over the repo rate for home loans typically ranges from 1.90% to 2.50%, depending on the bank and your credit profile. This means home loan rates range from approximately 8.40% to 9.00% for borrowers with good CIBIL scores (750+).
Can the bank change the reset period?
The RBI mandates a minimum quarterly reset for EBLR loans. Banks can offer more frequent resets (e.g., monthly) but cannot have resets less frequent than quarterly. Your specific reset schedule is mentioned in your loan agreement.
How does MCLR work for fixed-rate loans?
MCLR and EBLR are relevant only for floating-rate loans. Fixed-rate loans have a pre-determined interest rate that does not change with any benchmark. However, truly fixed-rate loans are uncommon for long-tenure products like home loans in India.
Should I do a balance transfer or just switch from MCLR to EBLR at the same bank?
Start by checking the cost and resulting rate of an internal MCLR-to-EBLR switch. If the rate after switching is competitive, stay with your bank. If not, compare with balance transfer offers from other banks. Sometimes a full balance transfer gives you a lower rate plus a top-up loan, making it more beneficial overall.
Sources and References
- RBI Circular on External Benchmark Lending Rate (September 2019): https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11677
- RBI — MCLR Framework Guidelines: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10193
- Reserve Bank of India — Monetary Policy Framework: https://www.rbi.org.in/Scripts/BS_ViewMonetaryPolicy.aspx
- SBI — External Benchmark Lending Rate Schedule: https://sbi.co.in/web/interest-rates/interest-rates/loan-schemes-interest-rates
- Indian Banks’ Association — Lending Rate Disclosures: https://www.iba.org.in/