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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 has increased its MCLR by 5 basis points for all tenures. According to ICICI Bank's official website, the overnight and one-month MCLR rates are now at 8.50 per cent. The MCLRs for three months and six months are set at 8.55 per cent and 8.90 per cent, respectively. The one-year MCLR currently stands at 9 per cent.
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ICICI Bank
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Bank of India's lending rates:
Bank of India on Wednesday raised its loan rates by up to 5 basis points for specific tenures. As per information from the Bank of India's website, the overnight MCLR rate is 7.95 per cent, and the one-month MCLR rate is now 8.15 per cent. The MCLRs for three months and six months have been adjusted to 8.35 per cent and 8.55 per cent, respectively. The one-year MCLR has been revised to 8.75 per cent, while the three-year MCLR remains at 8.95 per cent.
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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.
Under the MCLR system, financial institutions needed to charge a minimum interest rate for specific loans, setting a lower limit for loan interest rates. MCLR was designed to address issues associated with the Base Rate regime and allowed borrowers, including those seeking home loans, to benefit from rate cuts imposed by the RBI.
Notably, an increase in the repo rate typically leads to a higher MCLR, resulting in higher lending rates.
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.
