EBLR (External Benchmark Lending Rate)

1. The RBI's repo rate

1. The Government of India's 3-month or 6-month treasury bill yield

1. Any other benchmark published by Financial Benchmarks India Pvt. Ltd. (FBIL)

Impact of EBLR

The impact that EBLR has had is mentioned below:

1. Faster Monetary Policy Transmission: EBLR has addressed the key drawback of previous systems, which was the delayed and often incomplete transmission of RBI's policy rate changes. Now, when the RBI cuts the repo rate, the interest rates for EBLR-linked loans are reset within the next three months, providing quicker benefits to borrowers.

1. Increased Transparency: The EBLR system provides a straightforward and public formula for calculating interest rates. Borrowers can easily track the movement of the external benchmark, eliminating the opacity that was often associated with internal benchmarks like MCLR.

1. Standardisation: The adoption of EBLR has brought a degree of standardization across banks, making it easier for borrowers to compare loan products and find the most competitive rates.

Benefits of EBLR for Borrowers

The main advantages of EBLR for borrowers are mentioned below: 

1. Timely Benefits from Rate Cuts: When the RBI reduces the external benchmark, borrowers with EBLR-linked loans experience a quick reduction in their interest rates. Therefore, their Equated Monthly Instalments (EMIs) reduce. 

1. Transparency: The direct linkage of loan rates to a publicly available benchmark allows borrowers to understand exactly how their interest rate is calculated and why it changes. 

1. Potential for Lower Interest Rates: In a favourable economic environment with falling interest rates, EBLR-linked loans can lead to substantial savings over the loan's tenure, making borrowing more affordable. 

Benefits of EBLR for Banks

The main advantages of EBLR for banks are mentioned below: 

1. Reduced Regulatory Scrutiny: By adopting a transparent, external benchmark, banks face less regulatory scrutiny regarding their interest rate-setting process. 

1. Competitive Advantage: Banks can use a competitive spread over the external benchmark to attract customers, especially during periods of stable or falling interest rates. 

1. Market Alignment: EBLR ensures that the bank's lending rates are aligned with broader market conditions, reducing the risk of being out of sync with the overall financial environment.

Why to Shift from IBLR to EBLR?

The main reasons to shift from IBLR to EBLR are mentioned below: 

1. Poor Transmission: Under IBLR, banks were slow to pass on the benefits of RBI's rate cuts to borrowers. The internal benchmarks had long reset periods (often one year), meaning borrowers had to wait a long time to see a reduction in their EMIs. EBLR, with its quarterly reset, solves this problem. 

1. Lack of Transparency: The calculation of IBLR was often complex and based on a bank's internal cost of funds, making it difficult for borrowers to verify the lending rate. EBLR's public benchmark brings a new level of clarity. 

1. Uncertainty and Variability: The subjective nature of IBLR led to a wide variation in lending rates across different banks, making it challenging for customers to compare loan products effectively. EBLR provides a standardized, public reference point for comparison. 

By moving to EBLR, borrowers can ensure they are part of a more transparent, responsive, and fair lending system. 

The introduction of EBLR marks a significant step towards a more transparent and efficient lending system. By linking lending rates to external benchmarks, the RBI has ensured that the benefits of monetary policy changes are passed on to borrowers in a timely and direct manner. For new borrowers, EBLR is the standard for floating rate loans, and for existing borrowers, it offers an opportunity to move to a more transparent and responsive interest rate regime. 

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