Canara Bank customers who have bought loans linked to the Marginal Cost of Funds-based Lending Rate (MCLR) could see higher equated monthly instalments (EMIs) after the state-owned company revised lending rates on select tenors.
Increased MCLR may push up borrowing costs for customers whose loans have long tenors.
What has changed
According to the bank’s announcement on March 12, most short- and medium-term MCLR tenors remain unchanged. However, the bank has raised rates on longer tenors.
The revised MCLR structure is as follows:
Overnight MCLR: 7.85 per cent (unchanged)
One-month MCLR: 7.90 per cent (unchanged)
Three-month MCLR: 8.15 per cent (unchanged)
Six-month MCLR: 8.50 per cent (unchanged)
One-year MCLR: 8.70 per cent (unchanged)
Two-year MCLR: 8.95 per cent (up from 8.85 per cent)
Three-year MCLR: 9.00 per cent (up from 8.90 per cent)
The increase in the two-year and three-year tenors is modest at 10 basis points each, but it can still translate into higher EMIs for borrowers whose loans are linked to these benchmarks.
How MCLR affects loan installments
MCLR is an internal benchmark used by banks to price certain floating-rate loans. Many home loans, personal loans and business loans sanctioned before the shift to external benchmark-linked lending rates (EBLR) are still tied to MCLR.
If a bank raises the relevant MCLR tenor, the borrowing rate for customers linked to that tenor may rise with their loan reset date. This can lead to:
A higher EMI or a longer loan tenure if the EMI remains unchanged
However, the impact will depend on the reset period mentioned in the loan agreement. For instance, if a borrower’s home loan resets annually, the new rate will apply only at the next reset date.
Impact likely limited for new borrowers
Most new floating-rate retail loans are linked to external benchmarks such as the repo rate rather than MCLR. As a result, changes in MCLR mainly affect older loan accounts that continue under this system.
Borrowers should check their loan documents to see whether their loan is linked to MCLR and identify the applicable reset cycle.
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