Your home EMI rises with RBI hikes, but doesn’t fall? A CFP points to one outdated loan model

When RBI hikes rates, your loan EMI rises almost instantly but when rates drop, the benefit rarely shows up. Financial planner Kirtan A Shah says the reason might lie in how your loan is benchmarked, and millions of Indians could be overpaying because of it.

In a LinkedIn post, Shah, a certified financial planner (CFP), flagged a critical but often-overlooked issue: many borrowers are still tied to the Marginal Cost of Funds Based Lending Rate (MCLR), a system banks used before 2019 to set interest rates based on internal cost calculations.

The issue? MCLR doesn’t guarantee timely rate cuts. “There is no standard procedure to pass the rate benefits to you,” Shah wrote. “Banks do the change depending on their own process which is not transparent & frequency is also not defined.”

In contrast, the External Benchmark Lending Rate (EBLR), introduced in 2019, is directly linked to the RBI repo rate. Shah explains that EBLR adjusts quarterly, ensuring better and faster rate transmission.

Yet despite being available for six years, over 36% of floating-rate loans in India remain on MCLR, according to Shah—resulting in borrowers potentially paying lakhs more in interest over time.

To help consumers take control, Shah urged borrowers to check their loan terms and shift to EBLR if still on MCLR. He also shared a ready-to-use template to send to banks requesting details and initiating the conversion.

Shah shared a letter that asks banks to confirm the current benchmark, explain the conversion process to EBLR, provide cost breakdowns, and outline the timeline and documentation required—all in accordance with RBI guidelines.

“Please check with your bank,” Shah wrote. “If you are on MCLR, move to EBLR.”