TLDR: The External Benchmark Lending Rate (EBLR) is a system of lending in India whereby the floating interest rates of a bank charged by it on loan are directly linked to an external and public benchmark, most commonly the RBI’s Repo Rate. This framework was introduced to ensure that loan interest rates are more transparent and changes in the central bank’s policy rates are passed on to borrowers promptly and effectively.
What is the External Benchmark Lending Rate (EBLR)?
External Benchmark Lending Rate (EBLR) is a framework of lending rates in India, where a bank’s floating interest rates of retail loans are linked to an external benchmark. The most common benchmark is the Repo Rate set by the Reserve Bank of India (RBI), but other benchmarks such as yields on government treasury bills may also be used by banks.
This system is required by RBI from October 2019 and is expected to make the system of setting the interest rate on loans more transparent and responsive to the changes in monetary policy of the central bank.
Benefits of EBLR for Borrowers and Banks
The introduction of EBLR was necessitated to overcome the problem of sluggish and incomplete transmission of RBI policy rate changes to borrowers under the prior systems such as Marginal Cost of Funds-based Lending Rate (MCLR)
- Transparency for Borrowers: As the benchmark is public and determined by an external body such as the RBI, borrowers can easily follow and understand the method of calculating their interest rate. This means there are no surprises and they can expect their loan rates to change.
- Quicker Rate Transmission: When repo rate is reduced by RBI, there is much faster transmission of advantage to borrower’s loan interest rate than in the MCLR system. This results in savings on Equated Monthly Installments (EMIs) at a faster rate.
- Improved Monetary Policy Effectiveness: For the RBI, EBLR means that its policy decisions to control inflation or stimulate economic growth are effectively and in time transmitted to the real economy.
How EBLR Impacts a Borrower’s EMI Outgo
The interest rate on a loan tied to the EBLR is determined as:
Final Loan Interest Rate = EBLR + Lender’s Spread
The EBLR itself is linked to a benchmark such as the repo rate. If repo rate changes, EBLR changes, which directly affects the interest rate on your loan and so your EMI.
- If repo rate is reduced by RBI, then EBLR also reduces and results in reduction in your EMI.
- If the repo rate is increased by RBI, then the EBLR increases which will increase your EMI.
This is a direct linkage which means that your EMI will be more dynamic and will change as the policies of the central bank change.
EBLR vs. MCLR
Before the EBLR system, banks in India used the MCLR to set their lending rates. The key difference between EBLR vs MCLR is the basis of the benchmark.
| Factor | EBLR | MCLR |
| Benchmark | External (e.g., RBI Repo Rate, T-bills) | Internal (based on a bank’s cost of funds) |
| Transparency | High; publicly available benchmark | Low; depends on the bank’s internal calculations |
| Rate Transmission | Fast and direct | Slow and often incomplete |
This is why, when it comes to EBLR vs MCLR, the EBLR is often considered better for borrowers.
