HDFC Bank, one of India’s largest private sector lenders, has announced a 10 basis point reduction in its Marginal Cost of Funds-based Lending Rates (MCLR) across various loan tenures. This move is expected to bring relief to borrowers with MCLR-linked loans, including those with home loans, personal loans, and business loans.

The revised rates, which come into effect from April 7, 2025, now stand between 9.10% and 9.35% across different tenures.

New MCLR Rates Effective April 7, 2025

Here is a breakdown of the updated MCLR rates by tenure:

These changes mean that borrowers with loans linked to these tenures will see a reduction in their interest outgo, and in many cases, a corresponding drop in monthly EMIs (Equated Monthly Instalments).

Understanding MCLR and Its Role in Lending

The Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum interest rate below which a bank cannot lend, except in certain specified cases. It was introduced by the Reserve Bank of India (RBI) in April 2016 to bring greater transparency and uniformity in loan pricing.

Before MCLR, banks followed the Base Rate or Benchmark Prime Lending Rate (BPLR) system. These older benchmarks often didn’t reflect the market conditions or RBI’s rate cuts promptly, making borrowing more expensive for customers.

MCLR was introduced to:

• Ensure fair pricing of loans for borrowers.

• Improve transmission of RBI policy rates.

• Bring more transparency in the way lending rates are set.

When the MCLR changes, the interest rates on MCLR-linked loans also change, though with a reset period (usually 6 months or 1 year) depending on the loan agreement.

How Will Borrowers Benefit?

The 10 bps reduction in MCLR means that borrowers will likely see a decrease in their EMIs, depending on their loan tenure and reset clause. This is particularly beneficial in a high-interest environment, where every basis point of reduction adds up to significant savings over the loan tenure.

Here’s how different types of borrowers are affected:

• Home Loan Borrowers: Many floating-rate home loans are linked to 1-year MCLR. A 10 bps drop could lead to a noticeable reduction in EMIs, especially for long-tenure loans.

• Personal Loan Borrowers: While most personal loans are short-term and sometimes fixed-rate, those linked to MCLR will benefit if their reset date falls post-April 7, 2025.

• Business Loans: Working capital and term loans that are MCLR-linked will also see reduced interest payments, thereby improving cash flow for MSMEs and enterprises.

What Should Borrowers Do Now?

If you’re a borrower with an MCLR-linked loan, here’s what you should consider:

• Check your loan document to identify your MCLR tenure (e.g., 1-year, 6-month) and reset date. Your EMI won’t change immediately unless the reset period is due.

• For loans with annual resets, the new MCLR rate will be applicable on the next anniversary of your loan disbursement/reset.

• If you’re planning to apply for a new loan, this could be a good time to explore better interest rates with reduced MCLR in place.

How MCLR Differs From Other Lending Rates

India’s banking system has gradually shifted many loans from MCLR to external benchmark-linked lending rates (EBLR) since 2019, especially for retail and MSME loans. These are linked to external benchmarks like the RBI repo rate, and their response to RBI rate changes is faster.

However, a significant number of loans still remain linked to MCLR, especially older loans or those taken from banks that haven’t moved all products to external benchmarks.

Key Differences Between MCLR and EBLR:

Why Has HDFC Bank Reduced MCLR Now?

The exact reason for HDFC Bank’s MCLR cut hasn’t been specified, but possible factors include:

• Improved cost of funds: If HDFC Bank is able to raise deposits at a lower cost or mobilize cheaper funds, it may pass the benefit on to borrowers.

• Increased competition in lending space: As banks compete to attract borrowers, especially in home and retail loan segments, they tend to reduce their MCLR.

• Stable interest rate environment: With RBI maintaining a neutral stance on repo rates in recent months, banks may find room to reduce internal benchmarks like MCLR to support credit growth.

EMI Impact Example

To illustrate the impact of a 10 bps cut, here’s a quick example:

• Loan Amount: ₹30 lakh

• Tenure: 20 years

• Previous Rate: 9.40%

• New Rate: 9.30%

Monthly EMI at 9.40%: ₹27,840
Monthly EMI at 9.30%: ₹27,600

That’s a savings of ₹240 per month, and over the full loan term, it adds up to ₹57,600 in savings on interest payments.

Should You Switch From MCLR to EBLR?

Some borrowers may wonder if they should switch from MCLR to EBLR-linked loans, especially if the transmission is faster. While EBLR often offers quicker benefits from RBI rate cuts, switching may involve processing fees or paperwork.

Before switching, evaluate:

• The difference in effective interest rate

• Timing of your next MCLR reset

• Associated charges for switch

Final Takeaway

The latest MCLR cut by HDFC Bank is a welcome move for borrowers and reflects a customer-centric approach in an otherwise tight lending environment. It may also spur other banks to revise their lending rates and enhance credit uptake.

For those with existing MCLR-linked loans, now is a good time to monitor reset dates, review loan terms, or even negotiate better rates. For new borrowers, this may be an opportune time to lock in loans at lower rates.

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