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Key Highlights
- The external benchmark-based lending rate, or EBLR rate, strives to maintain transparency in the interest charged to borrowers.
- The EBLR rate is benchmarked against the repo rate, 91-day or 182-day treasury bill yields, or other approved benchmark interest rates.
- Your interest rate on loan = external benchmark + spread.
- Spread is the additional percentage that a bank charges to cover its cost, risk, and profit margin.
Have you ever wondered how a bank determines its lending rate each time you borrow funds? Also, doesn’t it make you curious to learn why the interest rate on your existing home loan changes?The central bank of India, i.e. the Reserve Bank of India (RBI), regulates these rates through various tools and ensures transparency in the rate determination process used by lenders.Continue reading as we explain some of these tools, with a focus on external benchmark-based lending rates, or EBLR rates.
Interest Rate Regulation
Interest rate regulation is important for economic stability. Some of the tools used by the Central Bank include: Repo Rate The rate at which banks borrow funds from the RBI is called the repo rate. Statutory Liquidity Ratio The statutory liquidity ratio indicates the reserves banks are expected to maintain before offering customers credit. Cash Reserve Ratio The cash reserve ratio indicates a certain percentage of cash banks need to keep as a deposit with the RBI.
Marginal Cost of Funds-Based Lending Rate
In April 2016, the RBI introduced the marginal cost of funds-based lending rate i.e. MCLR to enhance interest rate transparency. It is the minimum interest rate that a bank charges on a loan which remains fixed unless revised by the RBI. In other words, a bank is not permitted to lend below this benchmark rate.In this case, the interest rate calculation accounts for four factors: the tenor period, the marginal cost of funds, the operating cost, and the negative carry-on account of CRR. The banks were expected to adjust their interest rates according to changes in the repo rate.However, transferring rate-cut benefits to the borrowers took time. To address the challenges of the MCLR, the RBI introduced EBLR. External Benchmark-Based Lending Rate The RBI introduced the EBLR rate in October 2019 to enhance interest rate transparency and transfer the changes in the RBI rate into the loan rate quickly.The EBLR rate is benchmarked on market-derived benchmarks which are publicly accessible. These include:
- Repo rate
- 91-day or 182-day treasury bill yields
- Other approved benchmark interest rates
Most banks usually opt for the repo rate at their external benchmark.
Impact of the EBLR Rate Regime on Your Loan Interest Rate
You may want to understand how the EBLR rate impacts your home loan rate when the linked factors change. For this, let’s first understand the basic calculation.When you approach a bank for a loan, the interest rate is calculated as under:Interest Rate on Loan = External benchmark + spreadSpread is simply the additional percentage that your bank charges to cover its cost, risk, and profit margin. The benchmark rate (e.g. repo rate) varies according to the market conditions. Hence, your loan interest rate is a floating rate and it changes accordingly.If the external benchmark is the repo rate, a reduction in the repo rate typically translates into reduced cost of home loans, resulting in lower EMIs. Also Read: How to Calculate Home Loan Eligibility?
Understand the EBLR Rate for Your Home Loan
If your home loan is based on the EBLR rate, it is important to understand its functioning. Unlike the fixed interest rate, it is floating and changes depending on the external benchmark. It ensures transparency in the interest rate, and you can enjoy interest rate savings as applicable.Talking about transparency, ensure to submit all valid documents on time without concealing any information at the time of home loan application. A home loan contributes to achieving the significant milestone of owning a home.All-in-all, knowledge of relevant clauses and transparency makes you an informed and credible home loan borrower. Also Read: Home Loan Process - Step-by-Step Procedure to Get a Home Loan
FAQS - FREQUENTLY ASKED QUESTIONS
What does EBLR stand for in EBLR rate?
EBLR stands for External Benchmark Based Lending Rate.
Is the EBLR rate fixed or floating?
The EBLR rate is floating and changes according to market conditions.
Which are the benchmarks linked to the EBLR rate?
The EBLR rate is benchmarked against the repo rate, 91-day or 182-day treasury bill yields, or other approved benchmark interest rates.
What is a repo rate?
The rate at which banks borrow funds from the RBI is called the repo rate.
How is the interest rate on a loan calculated under EBLR?
Your loan interest rate is calculated using the formula:
External benchmark + Spread
What is the meaning of spread?
Spread is the additional percentage that a bank charges to cover its cost, risk, and profit margin.
What are the advantages of EBLR?
It ensures transparency in the interest rate, and you can enjoy interest rate savings as applicable.
What if the EBLR is linked to the repo rate, and the repo rate reduces?
If the external benchmark is the repo rate, a reduction in the repo rate typically translates into reduced cost of home loans, resulting in lower EMIs.
Why was the EBLR rate introduced?
Addressing the challenges of the MCLR, the Central Bank introduced the EBLR rate to enhance interest rate transparency and transfer the changes in the RBI rate into the loan rate quickly.
What does MCLR stand for?
MCLR stands for marginal cost of funds based lending rate.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
