What is External Benchmark-Based Lending Rate (EBLR) & How It Works

• 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 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.

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.

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?

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