Effect of External Benchmark Lending Rates on Home Loan Borrowers - Home Loan Stories - Kotak Bank

14 NOVEMBER, 2019

The Reserve Bank of India has replaced the Marginal Cost of Funds based Lending Rate (MCLR) with an external benchmark to ensure better transmission of policy rates. If you are planning to get a home loan with floating interest rates, then it is good news for you. RBI has directed all banks to link the new loans to one of the external benchmarks after 1st October 2019. The four benchmarks are,

  • Repo Rate
  • Three-month Treasury Bill
  • Six Months Treasury Bill
  • Any other Benchmark Published by the Financial Benchmark India Pvt. Ltd.

Out of the above four benchmarks, most banks are choosing the repo rate to decide the interest rates on loans like personal loans, retail loans, home loans, etc. This year, the repo rate has been cut down by the RBI many times. However, the home loan buyers did not receive the benefit of it due to the guidelines of MCLR. This is the reason why the RBI has replaced MCLR with the external benchmark lending rate system.

Now, you must be thinking about the effect of these changed policies on existing and new home loan borrowers. Here is the possible effect on both types of borrowers.

The impact of External Benchmark based Lending Rates on New Borrowers

All banks are obliged to link external benchmark based lending rates to new personal, home and retail loans with floating interest rates. Moreover, banks are free to offer the same to their customers that are applying for any other type of loan.

Under the MCLR system, the transmission of decreased repo rates was not happening proportionately.

According to the circular published by RBI, the external benchmark linked interest rate will be reset at least once in three months. This will eventually make banks revise the floating interest rates on loans every three months and borrowers will get the benefits in a short time.

The Impact of External Benchmark based Lending Rates on Existing Borrowers


The RBI has declared that the existing borrowers can switch to external benchmark based lending rates from MCLR if they wish. However, they need to carefully examine their loan agreement. They need to contact their bank to ask them the procedure for the switch. So, the home loan borrowers may have to pay additional charges for it based on the guidelines of their banks.

Lastly, external benchmark based lending rates are applied for the loans given by banks and not by NBFCs like housing finance companies (HFCs). Currently, it is unclear whether this change would apply to them.  

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.