ICICI Bank and Bank of India have raised their marginal cost-based lending rates (MCLR), and this adjustment will likely lead to higher equated monthly instalments (EMIs) for loans linked to MCLR.
The updated interest rates, effective from November 1, 2023, impact the benchmark one-year MCLR, which serves as the pricing reference for various consumer loans, including those for automobiles, personal expenses, and housing.
Let’s take a look at the latest MCLRs for ICICI Bank and Bank of India:
ICICI Bank’s lending rates:
ICICI Bank
Bank of India’s lending rates:
Bank of India
What is Marginal Cost of the Fund-Based Lending Rate (MCLR)?
The Marginal Cost of the Fund-Based Lending Rate or the MCLR is the minimum interest rate a financial institution needs to charge for a specific loan. It dictates the lower limit of the interest rate for a loan. Before MCLR, banks in India used ‘Base Rate’ to determine the minimum lending rate for most loans.
In April 2016, the Base Rate system was replaced by the Marginal Cost of Funds Based Lending Rate (MCLR) system to enhance the effectiveness of monetary policy transmission and increase transparency in the interest rate-setting process.
Notably, an increase in the repo rate typically leads to a higher MCLR, resulting in higher lending rates.
How do MCLR rates affect EMIs?
When MCLR changes, the interest rate on loans associated with it follows suit. Consequently, the EMI amount will either rise or fall based on the direction of the MCLR adjustment.
Typically, a reduced MCLR results in decreased interest rates, leading to lower EMIs for borrowers. Conversely, an elevated MCLR results in increased interest rates and higher EMIs for borrowers.
In the last policy address RBI governor Shaktikanta Das emphasised that while the repo rates have been raised by 250 basis points so far, this increase has not been fully transmitted to bank lending and deposit rates, implying that there is still room for a potential hike in lending rates.
The RBI Monetary Policy Committee kept the repo rate unchanged at 6.5 per cent for the fourth consecutive meeting in October, with the last increase of 25 bps occurring in February 2023.