External Benchmark Lending Rate

Indian Economy glossary

Also called: EBLR, Repo-linked lending rate, RLLR · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

The External Benchmark Lending Rate (EBLR) is a floating (changing) loan interest rate. It equals an outside benchmark rate that the bank does not control, such as the RBI's repo rate, plus a spread (an extra margin) that the bank adds on top.

  • Formula: EBLR loan rate = External benchmark rate + Spread
  • Why it matters: from 1 October 2019, it is mandatory for new floating-rate retail and MSME loans. It was brought in so that the RBI's rate changes reach borrowers faster and more fully than they did under the older internal benchmarks.

Explanation

How EBLR works

  • Benchmark: the bank links the loan to one outside rate. The allowed options are:
  • the repo rate (the interest rate at which the RBI lends money to banks for a short time),
  • the 3-month or 6-month Treasury bill (T-bill) yield (the return on short-term government borrowing), or

  • another benchmark published by FBIL (Financial Benchmarks India Ltd, the body that publishes official reference rates).

  • Spread: the bank adds its own margin on top of the benchmark. This margin covers the bank's costs, the borrower's credit risk and the bank's profit.

  • Who controls what:
  • The bank cannot change the benchmark, because it is set outside the bank.

  • The bank can only set the spread.

  • Repo-linked lending rate (RLLR): this is simply an EBLR that uses the repo rate as its benchmark. Most banks chose the repo rate.

Worked example

  • Repo rate 5.50% + spread 2.75% = loan rate 8.25%.
  • If the RBI cuts the repo rate by 0.25%:
  • The benchmark falls to 5.25%.
  • The spread stays at 2.75%.

  • The loan rate becomes 8.00% at the next reset (the date when the loan rate is revised).

  • Under MCLR, the same cut would work differently:

  • The bank first recalculates its own cost of funds.
  • Only then does it decide whether, and by how much, to cut the loan rate.
  • So the cut reaches the borrower later, and often only in part.

Why India moved to EBLR: the lending-rate regimes

Each old system was replaced because it passed on the RBI's rate changes too slowly or too weakly.

Regime Year Basis Problem
PLR 1994 Each bank's rate for its best borrowers Rigid
BPLR 2003 Benchmark PLR Opaque; most loans were given below it
Base rate July 2010 Average cost of funds (a floor) Slow, because old deposits sit in the average
MCLR April 2016 Marginal cost of funds (the cost of new money) Still internal, so it moved slowly
EBLR 1 Oct 2019 External benchmark + spread Current regime

What makes the EBLR rise or fall

  • The benchmark moves:
  • Repo rate up → EBLR up at the next reset → EMIs become costlier.

  • Repo rate down → EBLR down → borrowers pay less.

  • The spread changes:

  • The spread can change if the borrower's credit risk changes.

  • The bank cannot use the spread to cancel out the benchmark's movement.

  • Funding pressure affects the spread and new-loan pricing:

  • A high credit-deposit (CD) ratio (loans ÷ deposits) means the bank has little spare money to lend.
  • The bank then competes harder for deposits → deposit rates rise → loan rates rise.
  • An RBI study found that a high CD ratio strengthens the pass-through of repo-rate hikes [1].

In India

  • Regulator: the RBI sets the rules. FBIL publishes the market benchmarks that banks may use.
  • Origin:
  • In August 2017, the RBI set up an Internal Study Group to review the MCLR system.

  • The group found that transmission was weak. In its October 2017 report, it recommended an external benchmark-based lending rate [2].

  • Scope: EBLR has been mandatory for new floating-rate retail and MSME loans since 1 October 2019.

  • Evidence from the rate-hike cycle, May 2022 to September 2023:
  • The repo rate rose 250 basis points (1 basis point = 0.01%) [1].
  • The WALR (weighted average lending rate) on fresh loans rose 187 bps, about 75% transmission [1].
  • The WALR on outstanding loans rose only 111 bps, about 44%, because many old loans were still on MCLR [1].

  • The 1-year median MCLR rose 152 bps [1].

  • Share of floating-rate loans linked to an external benchmark (June 2023):

  • Foreign banks: 87.6% [1]
  • Private banks: 73.2% [1]
  • Public sector banks: 36.1% [1]
  • Result: PSB loan books still lean on MCLR, so RBI rate changes reach PSB borrowers more slowly.

Don't confuse with

  • MCLR (April 2016): MCLR is an internal benchmark that each bank calculates from its own marginal cost of funds. EBLR uses an external benchmark that the bank cannot change.
  • Base rate (July 2010): the base rate is based on the average cost of funds. MCLR is based on the marginal cost. EBLR does not use the bank's cost of funds at all. Swapping these is a classic trap.
  • Spread vs benchmark: under EBLR, the benchmark (for example, the repo rate) is external. Only the spread is set by the bank. This spread is not the same as the bank's overall spread (lending rate minus deposit rate), which is its main source of income.
  • Fixed-rate loans: the EBLR mandate covers only new floating-rate retail and MSME loans. Fixed-rate loans and large corporate loans are not covered by it.

Prelims Hooks

  • Order of lending-rate regimes: PLR (1994) → BPLR (2003) → Base rate (July 2010) → MCLR (April 2016) → EBLR (1 October 2019).
  • Allowed EBLR benchmarks: repo rate, 3-month or 6-month T-bill yield, or another FBIL benchmark. The bank's own MCLR is not allowed.
  • Mandatory for: new floating-rate retail and MSME loans. The trap is to write "all loans" or "corporate loans".
  • Under EBLR, the bank controls only the spread. It cannot change the benchmark.
  • The Internal Study Group on MCLR (set up August 2017, reported October 2017) recommended the external benchmark [2].
  • External-benchmark share of floating-rate loans (June 2023): foreign banks 87.6% > private banks 73.2% > PSBs 36.1% [1].

Mains Points

  • Faster monetary transmission: EBLR passed on about 75% of the 2022-23 repo hikes to fresh loans, but only about 44% to outstanding loans, because older MCLR loans still dominate [1].

  • Policy options: move old MCLR loans to EBLR, and push PSBs to catch up (36.1% vs 73.2% for private banks) [1].

  • The trade-off for banks:

  • Loan rates now follow the repo rate quickly, but most deposit rates are fixed for the term of the deposit.
  • So when the repo rate is cut, loan income falls at once, while deposit costs fall only slowly. This squeezes the net interest margin (NIM) (interest earned minus interest paid, divided by average earning assets).

  • One option is to link deposit rates to benchmarks too. This would make transmission faster, but NIMs would become more volatile.

  • Borrower's view (GS-III, inclusion and consumer protection):

  • EBLR is transparent, and cuts reach households and MSMEs quickly.
  • But in a tightening cycle, EMIs rise just as quickly. Borrowers carry the interest-rate risk, so clear disclosure and fair pricing of the spread matter.

Related concepts

Read more

Sources

  1. 1RBI Bulletin article on monetary policy transmission (EBLR/MCLR shares, WALR pass-through, CD ratio)rbi.org.in · tier 1
  2. 2RBI: Report of the Internal Study Group to Review the Working of the MCLR Systemrbi.org.in · tier 1