The lender reduces lending rates across all seven tenures, but the benefit for existing borrowers depends on the loan benchmark, reset date and applicable spread

HDFC Bank has reduced its Marginal Cost of Funds-based Lending Rate (MCLR) by 5–10 basis points across all seven listed tenures. The revised rates came into effect from September 7, potentially lowering borrowing costs for customers whose loans are linked to the bank’s MCLR benchmarks.

The bank’s MCLR range has declined to 7.90–8.60 per cent from 8.00–8.65 per cent earlier. However, the reduction does not mean every borrower will immediately see a lower equated monthly instalment (EMI). The actual impact depends on the benchmark linked to the loan, the reset frequency and the spread charged by the bank.

HDFC Bank’s revised MCLR rates

The lender has reduced all seven listed MCLR rates, with the cuts ranging from 5 bps to 10 bps.

A basis point is one-hundredth of a percentage point. Therefore, a 10-bps reduction represents a fall of 0.10 percentage point, while a 5-bps cut represents a reduction of 0.05 percentage point.

The overnight and one-month MCLR are now the lowest among HDFC Bank’s listed benchmarks at 7.90 per cent. The three-year MCLR remains the highest at 8.60 per cent.

Why the EMI may not fall immediately

Existing borrowers should not assume that their EMI will change as soon as the bank announces a reduction in MCLR.

MCLR-linked loans have a reset date specified in the loan agreement. Depending on the terms, the interest rate may reset every month, quarter, six months or once a year. The revised benchmark will affect the borrower only when the applicable reset date arrives.

For example, a borrower whose loan is linked to the one-year MCLR may not receive the benefit immediately if the next annual reset is several months away. The revised rate will generally apply when the scheduled reset takes place.

The final lending rate is also not equal to the MCLR alone. It is calculated by adding the spread charged by the bank to the applicable benchmark.

Effective lending rate = Applicable benchmark + Bank’s spread

Consequently, a 10-bps reduction in MCLR may not result in an identical reduction in the borrower’s final interest rate if other terms of the loan remain unchanged.

MCLR and repo rate are different

MCLR should not be confused with the policy repo rate set by the Reserve Bank of India (RBI).

The RBI introduced MCLR in 2016 as an internal benchmark based on a bank’s marginal cost of funds and other factors. Certain older floating-rate loans, including some home, vehicle and personal loans, may still be linked to MCLR.

Most new floating-rate retail and personal loans sanctioned since October 2019 are generally linked to an external benchmark, such as the RBI repo rate or a specified Treasury bill rate.

For external benchmark-linked loans, changes in the underlying benchmark have a more direct impact on the lending rate, subject to the spread and other contractual terms. This is why two borrowers with loans from the same bank may experience different interest-rate movements.

Home loan borrowers need to check their benchmark

The latest MCLR cut may have a limited direct impact on many existing home loan borrowers because most new floating-rate home loans are linked to an external benchmark rather than MCLR.

Borrowers should first check whether their loan is linked to MCLR, the repo rate, the bank’s external benchmark lending rate or another reference rate. The loan agreement and latest loan statement generally mention the applicable benchmark and spread.

A borrower with an MCLR-linked loan may benefit when the relevant MCLR resets. However, a borrower with an external benchmark-linked loan will not necessarily see any change merely because HDFC Bank has revised its MCLR.

Other lending rates remain separate

The latest MCLR revision is separate from HDFC Bank’s base rate and Benchmark Prime Lending Rate (BPLR).

The bank’s base rate stands at 8.70 per cent, while its BPLR is 17.20 per cent per annum. These benchmarks apply to loans depending on the lending regime and the terms under which they were sanctioned.

Borrowers should therefore avoid comparing the MCLR with the interest rate shown on their loan statement without checking the applicable benchmark and spread.

What borrowers should do

Existing borrowers should review their loan documents and confirm the following details:

• Whether the loan is linked to MCLR or an external benchmark.

• Which MCLR tenure applies to the loan.

• The next interest-rate reset date.

• The spread charged over the benchmark.

• The revised effective interest rate after the reset.

• Whether the bank will reduce the EMI or adjust the remaining loan tenure.

Borrowers considering a balance transfer should also calculate the total cost of switching. Processing fees, legal charges, administrative expenses and other costs may reduce or eliminate the benefit of a small interest-rate reduction.

A borrower should also compare the savings from a lower rate with the cost of refinancing. If the difference in interest rates is small, continuing with the existing loan may be more economical than paying switching charges.

Market Outlook

The MCLR reduction could provide limited relief to eligible borrowers, but the immediate impact will vary according to the loan’s benchmark and reset date. Borrowers with older MCLR-linked loans may benefit at their next reset, while those with external benchmark-linked loans will need to track movements in the underlying benchmark instead.

The cut may support credit demand if banks continue to reduce lending rates. However, borrowers should focus on the effective interest rate rather than the headline MCLR reduction and assess whether refinancing or prepayment would deliver meaningful long-term savings.

For investors, the rate cut may support loan demand and improve affordability at the margin, but its impact on HDFC Bank’s profitability will depend on funding costs, deposit growth, credit demand and net interest margins.