Borrowers with loans linked to the Marginal Cost of Funds-Based Lending Rate (MCLR) may see their borrowing costs rise after Bank of Baroda and Canara Bank revised their MCLR rates on select tenures, effective from August 12, 2026. The move comes shortly after the Reserve Bank of India (RBI) decided to keep the repo rate unchanged at 5.25% at its latest Monetary Policy Committee (MPC) meeting.
While the increase in MCLR is relatively small, ranging from 5 basis points (bps) to 10 bps, the change can have an impact on borrowers, particularly those servicing large or long-term loans. The actual effect, however, will depend on the type of loan, the benchmark to which it is linked and the reset frequency applicable to the borrower.
The latest changes also highlight an important distinction in the banking system: an increase in MCLR does not necessarily mean that the RBI has raised the repo rate. Banks can revise their MCLR based on changes in their own cost of funds and other components used to calculate the benchmark.
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Bank of Baroda Raises Three-Month MCLR by 10 Basis Points
Bank of Baroda has increased its three-month MCLR by 10 bps, taking the rate from 8.20% to 8.30%.
The bank has, however, left its other listed MCLR tenures unchanged. Its overnight MCLR remains at 7.85%, while the one-month MCLR continues at 7.95%.
Similarly, the six-month MCLR remains unchanged at 8.50%, and the one-year MCLR stays at 8.75%.
The selective nature of the revision means that the immediate impact will not be identical for all Bank of Baroda customers. Borrowers whose loans are linked to the revised three-month MCLR and whose reset dates coincide with the applicable revision could potentially face a higher interest rate.
For borrowers whose loans are linked to unchanged MCLR tenures, the latest revision does not automatically translate into an immediate increase in their loan rate.
Canara Bank Revises MCLR Across Multiple Tenures
Canara Bank has also raised its MCLR on several tenures, with increases of 5 bps.
The bank’s one-month MCLR has increased from 8.00% to 8.05%, while its three-month MCLR has moved up from 8.25% to 8.30%.
The six-month MCLR has also increased by 5 bps, from 8.60% to 8.65%.
Longer-duration MCLR-linked borrowing rates have also been revised. The one-year MCLR has risen from 8.75% to 8.80%, while the two-year MCLR has increased from 9.00% to 9.05%. The three-year MCLR has moved from 9.05% to 9.10%.
Canara Bank’s overnight MCLR, meanwhile, remains unchanged at 7.95%.
The revisions across multiple tenures mean that a wider group of MCLR-linked borrowers could be affected, depending on the benchmark and reset structure associated with their individual loan agreements.
What Is MCLR?
The Marginal Cost of Funds-Based Lending Rate, or MCLR, is an internal benchmark used by banks to determine the minimum lending rate for different categories of loans.
Introduced by the RBI, the MCLR framework is intended to make lending rates more responsive to changes in banks’ cost of funds and monetary policy conditions.
MCLR is calculated by taking into account several factors related to a bank’s cost of raising funds. These include the marginal cost of funds, operating costs, the cost of maintaining cash reserve requirements and the tenor premium applicable to a particular maturity.
Banks publish different MCLR rates for different tenures, such as overnight, one month, three months, six months and one year. Some banks may also publish MCLR for longer tenures.
This structure means that a borrower’s interest rate can depend not only on the bank but also on the specific MCLR tenor applicable to the loan.
Does an MCLR Hike Mean Loan EMIs Will Increase Immediately?
Not necessarily.
One of the most important factors borrowers need to understand is the reset period of their loan.
An MCLR-linked loan generally does not change its interest rate every time the bank publishes a new MCLR. Instead, the interest rate is revised according to the reset frequency specified in the loan agreement.
For example, if a borrower has an MCLR-linked loan with a particular reset period, a revision in the benchmark may affect the loan when its next reset date arrives. Therefore, borrowers should not assume that the latest MCLR revision will immediately increase their EMI.
The impact will also depend on whether the borrower’s loan is actually linked to one of the MCLR tenures that has been revised.
This is particularly relevant for customers of Bank of Baroda following its latest decision because the bank has increased only its three-month MCLR while leaving several other tenures unchanged.
How Does a 5-10 Basis Point Increase Affect Borrowers?
A basis point, commonly abbreviated as bps, is a unit used to express changes in interest rates.
One basis point equals 0.01 percentage point. Therefore:
- 5 bps = 0.05 percentage point
- 10 bps = 0.10 percentage point
At first glance, such changes may appear insignificant. However, the financial impact can become more noticeable when the loan amount is large and the repayment period stretches over several years.
For example, on a large home loan, even a small increase in the interest rate can increase the total interest payable over the life of the loan. Depending on the bank’s repayment mechanism, the borrower may either see a higher EMI, a longer repayment tenure, or a combination of changes.
The exact impact cannot be determined solely from the MCLR revision because the borrower’s spread over the benchmark and other terms of the loan also matter.
Existing Borrowers: Who Could Be Affected?
Existing borrowers should first determine whether their loan is linked to MCLR.
Customers with MCLR-linked floating-rate loans may be affected if the relevant MCLR has increased and the loan reaches its reset date.
For Bank of Baroda customers, the latest change is particularly relevant to borrowers whose loans are linked to the revised three-month MCLR.
For Canara Bank customers, the impact could potentially extend across several MCLR-linked loans because the bank has revised rates for one-month, three-month, six-month, one-year, two-year and three-year tenures.
However, the increase does not mean every existing borrower at either bank will automatically see a higher EMI from August 12. The loan agreement, benchmark tenure and reset date remain crucial.
What About New Borrowers?
People planning to take a new loan should also pay attention to the latest MCLR revisions, particularly if they are considering an MCLR-linked product.
A higher benchmark can translate into a higher lending rate when the bank determines the applicable interest rate for the borrower. However, the final rate offered to an individual customer may differ depending on the type of loan, borrower profile, creditworthiness, applicable spread and other factors.
Prospective borrowers should therefore compare the effective lending rate, rather than looking at the MCLR alone.
For long-term borrowing such as home loans, even a small difference in the interest rate can influence both the monthly repayment burden and the total interest paid over the loan period.
Fixed-Rate Borrowers Are Generally Shielded
Borrowers with genuine fixed-rate loans are generally not affected by changes in MCLR during the fixed-rate period.
This is because the interest rate on a fixed-rate loan is predetermined according to the terms of the loan agreement. A change in the bank’s MCLR does not automatically alter that fixed rate.
However, borrowers should check the specific terms of their loan, particularly where a loan transitions from a fixed rate to a floating rate after a specified period.
Why Did Banks Increase MCLR When the Repo Rate Remains Unchanged?
The latest MCLR revisions also raise a broader question: if the RBI has kept the repo rate unchanged at 5.25%, why have banks increased their lending benchmarks?
The answer lies in the difference between the repo rate and MCLR.
The repo rate is the rate at which the RBI lends short-term funds to commercial banks against eligible securities. It is a key monetary policy instrument and influences broader borrowing and liquidity conditions.
MCLR, on the other hand, is a bank-specific lending benchmark. It reflects the bank’s marginal cost of funds and other components used in determining its lending rates.
Consequently, Bank of Baroda an MCLR revision does not necessarily require a corresponding change in the RBI’s repo rate.
A bank may revise its MCLR because its own funding costs, operating expenses, deposit costs or other relevant factors have changed.
MCLR and Repo Rate: Why Borrowers Should Know the Difference
For borrowers, understanding the distinction between the two benchmarks is increasingly important.
A repo-rate-linked loan typically responds more directly to changes in the RBI’s policy rate, subject to the applicable reset mechanism. MCLR-linked loans, by contrast, are influenced by the bank’s own cost structure.
This Bank of Baroda means that even during a period when the RBI keeps the repo rate unchanged, an MCLR-linked borrower could potentially experience a change in the applicable lending rate.
The latest decisions by Bank of Baroda and Canara Bank demonstrate this distinction.
What Should Borrowers Do Now?
Existing borrowers should not panic over the latest MCLR revisions but should review their loan documents carefully.
The first step is to identify the benchmark rate attached to the loan. Borrowers should then check the applicable MCLR tenure and reset frequency.
Customers should also review their latest loan statements to determine whether the interest rate has changed and, if so, how the bank has adjusted the EMI or repayment tenure.
For Bank of Baroda borrowers with large outstanding balances, it may be useful to calculate the long-term effect of even a small interest-rate increase. Bank of Baroda Depending on the loan terms, making additional principal payments or evaluating alternative loan structures could help reduce the overall interest burden.
However, Bank of Baroda borrowers should consider any applicable charges, penalties and other terms before making a decision to refinance or switch loan products.
The Bigger Picture for Bank Borrowers
The latest MCLR revisions by Bank of Baroda and Canara Bank come at a time when borrowers are closely watching the direction of interest rates.
With the RBI repo rate currently at 5.25%, the central bank’s policy stance remains an important factor for the broader lending environment. Yet individual banks can still adjust their own lending benchmarks depending on their funding conditions.
For Bank of Baroda borrowers, this means that the headline repo rate alone does not tell the entire story.
The Bank of Baroda cost of a loan depends on several factors, including the benchmark, the bank’s spread, the reset period, the outstanding principal and the remaining repayment period.
The latest MCLR increases by Bank of Baroda and Canara Bank do not automatically mean that every borrower will face a higher EMI.
Bank of Baroda has raised its three-month MCLR by 10 bps to 8.30%, while keeping its overnight, one-month, six-month and one-year rates unchanged. Canara Bank, meanwhile, has increased MCLR rates by 5 bps across several tenures, including one month, three months, six months, one year, two years and three years.
The Bank of Baroda impact on individual borrowers will depend primarily on whether their loan is MCLR-linked, which MCLR tenure applies to it and when the next reset takes place. Fixed-rate borrowers are generally insulated from such changes during the fixed-rate period.
The Bank of Baroda key takeaway is that an MCLR hike should not be confused with a repo-rate hike. Banks can alter MCLR because of changes in their own funding costs and other internal lending-rate components.
Borrowers should therefore check their loan agreements, understand their reset dates and monitor changes in their applicable Bank of Barod interest rates before assuming that the latest MCLR revision will immediately increase their monthly repayment.
