Mumbai: Bank of Baroda and Canara Bank have raised their lending rates by up to 10 basis points, with the revised rates coming into effect from August 12. The changes affect select Marginal Cost of Funds-Based Lending Rate (MCLR) tenures and could increase borrowing costs for some existing and new borrowers.
Bank of Baroda has raised its three-month MCLR by 10 basis points, from 8.20 per cent to 8.30 per cent. Its other MCLR-linked rates have remained unchanged.
Canara Bank, meanwhile, has increased its MCLR by 5 basis points across most tenures. Its one-month rate has moved from 8 per cent to 8.05 per cent, while the three-month rate has increased from 8.25 per cent to 8.30 per cent.
The six-month, one-year, two-year and three-year MCLR rates have also risen by 5 basis points. The bank has kept its overnight MCLR unchanged at 7.95 per cent.
The changes have raised an important question for borrowers: will these relatively small increases translate into higher EMIs?
The answer depends primarily on whether a borrower’s loan is linked to MCLR and when the applicable interest-rate reset takes place.
What is MCLR and why does it matter?
MCLR stands for Marginal Cost of Funds-Based Lending Rate. It is an internal benchmark used by banks to determine lending rates for various loans under the regulatory framework of the Reserve Bank of India (RBI).
The benchmark reflects the marginal cost incurred by a bank when raising funds for lending. Factors such as the cost of deposits and other sources of funding can therefore influence a bank’s MCLR.
For borrowers whose loans are linked to MCLR, a revision in the benchmark can eventually affect the interest rate they pay.
However, an MCLR increase does not automatically mean that every borrower with the bank will see an immediate increase in their EMI.
The actual impact depends on the type of loan, the benchmark to which it is linked, the applicable spread and the reset frequency specified in the loan agreement.
Bank of Baroda raises three-month MCLR
Bank of Baroda has made a relatively limited change to its lending-rate structure.
The lender increased its three-month MCLR from 8.20 per cent to 8.30 per cent, representing an increase of 10 basis points.
Its other MCLR rates have been left unchanged.
The decision means that borrowers whose loans are specifically linked to the three-month MCLR could face a higher benchmark when their interest rate is reset.
A borrower whose loan is linked to another unchanged MCLR tenure would not necessarily be affected by this particular revision.
This distinction is important because banks maintain different MCLR rates for different maturity periods.
Canara Bank increases rates across several tenures
Canara Bank has made a broader adjustment.
The bank has increased its one-month MCLR from 8 per cent to 8.05 per cent and its three-month MCLR from 8.25 per cent to 8.30 per cent.
The six-month, one-year, two-year and three-year MCLR rates have also been increased by 5 basis points.
The overnight MCLR, however, remains unchanged at 7.95 per cent.
The changes mean that borrowers whose loans are tied to the revised tenures may eventually see their borrowing costs rise when their respective reset dates arrive.
Why are banks raising rates when RBI has not raised repo rate?
The latest changes are notable because the RBI has kept the repo rate unchanged at 5.25 per cent at its August 5 monetary policy meeting.
That means the latest MCLR increases are not the result of a fresh RBI repo-rate hike.
Instead, MCLR is influenced by a bank’s own funding costs.
Banks raise money primarily through deposits and other funding channels. If the cost of raising funds increases, a lender may revise its MCLR to reflect those higher costs.
In simple terms, the RBI has not increased the policy rate, but individual banks can still adjust their lending benchmarks based on their own financial circumstances.
This is why borrowers should not assume that every change in lending rates is directly linked to an RBI policy decision.
Will your home loan EMI increase?
For borrowers, this is perhaps the most important question.
An MCLR increase can affect the interest rate on an MCLR-linked loan, but not necessarily immediately.
The key factor is the loan’s reset period.
For example, if a borrower’s interest rate is reset every three months and the applicable MCLR has increased before the next reset date, the revised benchmark could be reflected in the loan rate.
Depending on the terms of the loan, a higher interest rate could result in a higher EMI, a longer repayment period or a combination of both.
Borrowers should therefore check their loan documents or contact their bank to determine the applicable reset frequency.
What about personal loans and other borrowing?
The impact will vary significantly depending on the type of loan.
Many loans are no longer directly linked to MCLR and instead use other external or internal benchmarks.
Consequently, a headline MCLR increase at a bank should not be interpreted as an across-the-board increase in the interest rate on every loan offered by that lender.
New borrowers should therefore ask the bank exactly which benchmark applies to the proposed loan.
They should also compare the benchmark, spread, processing fees and other charges rather than looking only at the headline interest rate.
For existing borrowers, the loan agreement should provide details about the benchmark and reset mechanism.
Even a small rate increase can matter
A 5 or 10 basis-point increase may appear insignificant.
However, the impact can become more meaningful when applied to a large loan over several years.
For instance, a small increase in the interest rate on a long-term home loan can add to the total interest paid over the life of the loan.
The actual increase will depend on the outstanding principal, remaining tenure, interest rate and reset mechanism.
This is why borrowers should not judge the impact simply by looking at the size of the MCLR change.
A borrower with a large outstanding balance and a long repayment period could be more sensitive to even a modest increase than someone with a smaller loan nearing the end of its tenure.
Existing borrowers should check their reset date
For people already repaying loans with Bank of Baroda or Canara Bank, the immediate priority should be to find out whether their loan is MCLR-linked.
If it is, borrowers should check:
- The MCLR tenure linked to their loan
- The current interest rate
- The applicable spread over MCLR
- The reset frequency
- The next reset date
- Whether the bank changes the EMI or repayment tenure after a rate revision
These details will determine whether the latest changes affect the monthly repayment.
A borrower should not assume that an MCLR revision announced by the bank will automatically change the EMI from the same month.
Why would banks increase MCLR?
For banks, lending rates are closely connected to profitability.
When the cost of raising funds increases, maintaining the previous lending rate can put pressure on the difference between funding costs and lending income.
Increasing MCLR can help banks protect their margins.
However, lenders also have to consider competition.
If borrowing becomes significantly more expensive, customers may postpone taking loans or compare offers from other banks and financial institutions.
This creates a balancing act for lenders: they need to protect profitability without making credit unattractive.
The latest increases by Bank of Baroda and Canara Bank are relatively small, suggesting that the banks are making measured adjustments rather than introducing a sharp increase in borrowing costs.
What should prospective borrowers do?
People planning to take a new loan should not automatically abandon their borrowing plans because of the latest MCLR changes.
Instead, they should compare the actual interest rate offered by different lenders and understand the benchmark used to calculate that rate.
For a home loan or other long-term borrowing, even a small difference in interest rates can have a meaningful impact over time.
Borrowers should also ask whether the loan is linked to an external benchmark or MCLR and how frequently the rate can change.
Understanding these details before signing a loan agreement can help prevent surprises later.
Conclusion
Bank of Baroda and Canara Bank have raised selected MCLR rates by 5 to 10 basis points, but the move does not mean that every borrower will immediately face a higher EMI.
Bank of Baroda has increased its three-month MCLR from 8.20 per cent to 8.30 per cent, while Canara Bank has raised most of its MCLR rates by 5 basis points, leaving its overnight rate unchanged at 7.95 per cent.
The revisions have come despite the RBI keeping the repo rate unchanged at 5.25 per cent, highlighting the role of individual banks’ funding costs in determining MCLR.
For existing borrowers, the key issue is whether their loan is MCLR-linked and when the next reset is due. Prospective borrowers should compare the complete loan structure, including the benchmark, spread and reset mechanism, rather than focusing solely on the latest MCLR announcement.