In a move that could ease the financial burden on borrowers, Punjab National Bank (PNB) and Bank of India (BoI) have announced a reduction in their Marginal Cost of Funds-based Lending Rates (MCLR) effective September 1, 2025. These revisions, which come even as the Reserve Bank of India (RBI) has kept the repo rate unchanged at 5.5% in its August 6, 2025, Monetary Policy Committee (MPC) meeting, may lead to lower equated monthly installments (EMIs) for customers with loans linked to MCLR.

Details of the MCLR Reductions

PNB has reduced its MCLR by up to 15 basis points (bps) across various tenures. The overnight MCLR has been reduced from 8.15% to 8.00%. The one-month MCLR has been cut from 8.30% to 8.25%, while the three-month MCLR has been lowered from 8.50% to 8.45%. The bank's six-month MCLR has decreased from 8.70% to 8.65%, the one-year MCLR from 8.85% to 8.80%, and the three-year MCLR from 9.15% to 9.10%.

Bank of India has also lowered its MCLR by 5 to 15 bps across all tenures with the exception of the overnight tenure. The one-month, three-month, and six-month MCLRs have been reduced by 10 basis points, while the one-year MCLR has been cut by 5 basis points and the three-year MCLR by 15 basis points.

Impact on Borrowers

MCLR is the minimum interest rate below which banks are generally not permitted to lend. It serves as a benchmark for determining the lowest possible interest rate across different types of loans offered by banks. A reduction in MCLR typically translates to lower borrowing costs for customers with loans linked to this benchmark. For existing borrowers, the impact of the MCLR cut will be visible only after the loan reaches its next reset date. For instance, if a loan is linked to the one-year MCLR, the benefit will only be reflected after the annual reset, not immediately. New borrowers, however, can avail of loans at the revised, lower rates.

The MCLR is determined by factors such as the repo rate, operating costs, and risk premium. When the MCLR changes, the interest rate on loans linked to it also changes, meaning that the EMI amount will increase or decrease depending on the direction of the MCLR movement.

Fixed Rate Loans

For fixed-rate retail loans, Bank of India charges a Fixed Rate Spread (FRS) of 1.5 percent. Accordingly, the rate of interest for fixed-rate retail loans linked to the three-year MCLR plus FRS is set at 10.50 percent effective September 1, 2025. Interest on such loans is quoted in the format: FRS (10.50 percent) + Applicable CRP.

MCLR vs. Other Lending Rates

The RBI introduced the MCLR framework on April 1, 2016, replacing the earlier base rate system. The objective was to strengthen the transmission of monetary policy and bring greater transparency and market linkage to the way banks determine lending rates. Under this framework, banks can extend loans at either fixed or floating interest rates.

While MCLR is more responsive to policy changes than the base rate system, it is still slower to reflect these changes compared to repo-linked lending rates (RLLR). In the MCLR regime, banks must adjust their interest rates as soon as the repo rate changes.