Right after when the Reserve Bank of India (RBI) trimmed down policy repo rate by another 25 basis points taking the indicator at 6%, state-owned lender Bank of Maharashtra has taken a step ahead. The bank has now cut their MCLR which is a benchmark for deciding lending rates on home loan, personal loan and vehicle loan. Bank of Maharashtra brings down its MCLR by 5 basis points each on various tenures. Now MCLR for 1-year tenure stands at 8.70% from previous 8.75%, while 8.50% rate is set on six months tenure from previous 8.55%. Also, shorter tenure like overnight, 1 month and 3 months, the MCLR rate is set at 8.20%, 8.25% and 8.45% compared to previous 8.25%, 8.30% and 8.45% respectively. The new MCLR rates will come into effect from April 07. 

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The bank in its notification said, “Post the recent rate cut by RBI, for the transmission of rate cut benefits to its consumer Bank of Maharashtra has reduced its MCLR by 5 basis points.”

However, the Bank of Maharashtra decided to keep base rate unchanged at 9.50% per annum. 

With the new cut in MCLR, does that mean your EMIs on home loan, personal loan and vehicle loan will become cheaper? Ideally when a MCLR rate is cut, the impact should be witnessed in your lending rates and hence EMIs. However, there are certain factors which needs to be noted, before opting for loan. 

Every month, a bank resets the MCLR rate either by increasing or cutting or keeping it unchanged. However, whatever be the MCLR, it is the spread decided for a loan that will reflect in your EMIs. Take note, a floating rate for loans is offered at a spread over the benchmark. 

There are two situations that can arise from MCLR cut. 

Situation 1 - MCLR cut, Spread same

For example - Currently, your MCLR rate is at 9% with a spread over benchmark of 25 basis points. This will mean your home loan interest rate comes at 9.25%. If the bank decides to cut MCLR by 10 basis points and keeps the spread at 25 bps. This would mean your MCLR has come down to 8.90% and with spread of 25 bps, your home loan then will come at 9.15%.

Such is a very rare occasion, as RBI has complained on banks not following a transparent form of lending. 

Situation 2 - MCLR cut, spread hike 

This is a most likely the picture on your lending rates. For example, MCLR rate which was at 9%, was brought down to 8.75%. The bank further decides to hike spread by 25 bps, which will now become 50 bps. Hence, then your home loan rate remains unchanged at 9.25%. 

Therefore, make sure to know your banks spread on your loan over MCLR.