RBI’s rate cut may not bring immediate EMI relief for all borrowers

The actual transmission, whether faster, slower, or none at all, will depend on multiple factors, including the type of loan, when it was taken, the lending institution, and the benchmark it is linked to.

Fixed or floating: the nature of your loan matters

Certain loan categories — particularly personal loans and credit card debt — are typically offered at fixed interest rates. The rate set at the time of disbursement remains unchanged through the tenure of the loan, regardless of RBI’s policy moves.

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“Most lenders offer loans in these categories as fixed-rate loans. Then there are categories, which are more of a mixed bag. For example, loans such as car loans and loans against securities,” said Adhil Shetty, chief executive officer of BankBazaar. To be sure, some public sector banks even offer personal loans with a floating rate option.

When it comes to car loans or loans against securities, the interest rate may be fixed or floating. If floating, these are linked either to internal or external benchmarks set by the banks. Since 1 October 2019, all new floating-rate loans must be linked to external benchmarks. However, older loans are often tied to internal benchmarks.

According to RBI’s Annual Report 2024-25, 35.9% of floating-rate loans are still linked to the marginal cost of funds-based lending rate (MCLR), an internal benchmark.

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Home loans are predominantly floating-rate products, while fixed-rate options are also available. Borrowers who took home loans after October 2019 are generally linked to external benchmarks, while older loans may still be tied to MCLR. This distinction is crucial in determining how quickly borrowers benefit from the RBI’s latest repo cut.

MCLR vs EBLR: how your benchmark affects transmission

For loans linked to MCLR, the transmission is typically delayed due to reset cycles, which may occur annually or half-yearly depending on the bank. Even though the RBI provides the formula for calculating MCLR, banks apply their own internal cost structures to arrive at their minimum lending rates.

“While the formula for calculating MCLR is given by the RBI, it is an internal benchmark, which means it will vary across banks. Banks will use their internal costs and calculation of risks to decide their minimum lending rate under MCLR framework. The variables include cost of funds for the banks (deposits), other borrowings, return on net worth, operating costs, tenor premium (longer loan tenor would mean higher risk premium) and negative carry from RBI’s cash reserve ratio,” explained Joydeep Sen, corporate trainer and author.

The CRR,  the percentage of deposits banks are required to maintain with the RBI, results in negative carry because these funds typically earn lower returns. Banks are allowed to factor this into their MCLR calculations.

By contrast, loans under the external benchmark lending rate (EBLR) regime, most commonly linked to RBI’s repo rate, usually see faster transmission. The repo-linked lending rate (RLLR) adjusts more swiftly, typically on a quarterly reset cycle.

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As the repo-linked lending rate (RLLR) is directly linked to RBI’s repo rate, it will usually lead to full quantum of repo cut getting passed onto the borrowers and the transmission is likely to happen faster as the EBLR framework follows quarterly reset cycle.

NBFC loans: more flexibility, less transmission certainty

For borrowers with loans from non-bank financial companies (NBFCs), the picture is more complex. While NBFCs are regulated by RBI, they are not mandated to follow the benchmark frameworks applicable to banks.

“NBFCs have their internal models to determine their base rates. These rates are influenced by factors such as cost of funds, overhead costs and asset-liability mismatches,” pointed out Jagadeesh Mohan, founder of EMI Saver and former PhonePe executive.

For NBFCs, assets are the loans they have extended, and liabilities are funds borrowed from banks, debt markets, or depositors. Asset-liability mismatches occur when most borrowings are of short tenure, while loans extended have longer tenures.

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Additionally, NBFCs can set their own reset frequencies. Existing borrowers may not necessarily benefit from RBI’s repo cut, or the impact may be limited depending on the lender’s funding costs, competition, and business strategy. 

“NBFCs with better credit ratings might be better placed to pass on the benefits of RBI’s repo cut due to the lower cost of raising funds on account of their credit rating and better access to funds through their distribution channel,” said Abhishek Kumar, a registered investment advisor and founder of SahajMoney.