Context:
The country’s largest lender, State Bank of India (SBI), reduced its External Benchmark Lending Rate (EBLR) and home loan rate by 50 basis points, keeping with Reserve Bank of Indias half per cent cut in policy repo rate. The revised EBLR would be 8.15 per cent as against the old rate of 8.65 per cent.
External Benchmark Lending Rate (EBLR)
The External Benchmark Lending Rate (EBLR) represents a paradigm shift in India’s banking landscape, aiming to ensure better transmission of monetary policy to end borrowers. Initiated by the Reserve Bank of India (RBI), EBLR replaced internal benchmarks like IBLR and MCLR, which were found ineffective in ensuring fair and timely rate transmission.
Background: Evolution from IBLR and MCLR
Before EBLR, Indian banks relied on two major benchmarks:
- Internal Benchmark Lending Rate (IBLR)
- Marginal Cost of Funds Based Lending Rate (MCLR)
Despite RBI’s policy rate cuts, banks often failed to pass on the benefits to borrowers, citing factors like internal spreads, operational costs, and non-performing assets. This inefficiency led RBI to constitute an Internal Study Group (ISG), whose recommendations culminated in the adoption of EBLR from October 1, 2019.
What is EBLR?
EBLR stands for External Benchmark Lending Rate, a rate linked to an external reference such as:
- RBI’s Repo Rate
- 3-month or 6-month Treasury Bill yield
- Any other benchmark published by Financial Benchmarks India Pvt. Ltd (FBIL)
Key Regulatory Instructions by RBI
- All floating-rate retail and MSME loans must be linked to EBLR.
- A bank must adopt a single benchmark for each loan category.
- The interest rate must be reset at least once every 3 months.
- Spread over EBLR is permitted, but any increase must be based on material changes in the borrower’s creditworthiness.
Why the Shift to EBLR?
The transition to EBLR was driven by key shortcomings of IBLR and MCLR:
- Poor transmission of RBI’s rate cuts to borrowers.
- Lack of transparency in internal benchmark setting.
- Limited influence of monetary policy on actual lending rates.
- Variability in spreads and subjective decisions across banks.
Impact of a Reduction in External Benchmark Lending Rate (EBLR) on Borrowers
When the External Benchmark Lending Rate (EBLR) is reduced, borrowers with EBLR-linked loans—such as home loans, personal loans, and loans to small businesses—generally benefit from lower interest rates. This mechanism ensures faster and more transparent monetary transmission compared to older internal benchmark systems like MCLR (Marginal Cost of Funds Based Lending Rate).
