What is EBLR and Its Impact on Loan Interest Rate?

You’ve probably heard of the EBLR rate if you’ve ever taken out a loan or intend to do so. The EBLR full form is External Benchmark Linked Rate, which may sound complex, but it’s changing how financial institutions determine the interest rates on your loans. So, what is EBLR? Why was it implemented? More importantly – how does it affect you, the borrower?

What is EBLR?

EBLR rate refers to the loan interest rate mechanism in which the interest rate is pegged with an external benchmark instead of an internal computation. Before EBLR, financial institutions computed the loan interest rates using internal benchmarks such as MCLR (Marginal Cost of Funds Lending Rate) or the base rate. The drawback of such methods is that they lack transparency and do not reflect changes in market conditions at the right time.

Under the EBLR, loan interest rates are benchmarked on a publicly accessible, market-derived benchmark. Such standard benchmarks can be:

1. Repo rate is the interest rate RBI lends to commercial financial institutions.

2. 91-day or 182-day treasury bill yields are short-term central government securities.

3. External benchmarks approved by RBI.

Thus, your interest rate on loans will be given as follows.

Loan Interest Rate = External Benchmark + Spread

The spread is an additional percentage the lenders charge to account for their cost, risk, and profit margin. The benchmark rate varies depending on market conditions, so the interest rate for your loan would change accordingly.

Why was EBLR Introduced?

Before EBLR, the borrowers complained that the financial institutions were taking time to transmit the rate cuts announced by the RBI. That is when the RBI used to cut the rates to reduce the cost of borrowing, the lenders would be slow to pass on the benefits to the customers.

The RBI introduced EBLR in October 2019 with the following objectives: 

1. Transparency: The interest rates charged to the borrowers should be transparent and understandable.

2. Instant transmission of the rate: Transfer the change in RBI rate almost immediately into loan rates.

3. Uniformity: Uniformise the financing system.

EBLR aimed to streamline the lending process, making it borrower-friendly and consistent with market requirements.

How Does EBLR Work?

Here is how EBLR affects your loan interest rate:

1. Instant reaction to a rate change

Upon the RBI’s repo rate cut, some lenders with loans directly tied to this benchmark automatically transfer the reduction to the debtors. That means reduced home loan interest rates and smaller EMIs for you.

2. Higher volatility

The flip side is that your loan interest rate will increase immediately when the benchmark rate rises. Your EMIs may increase, which can affect your monthly budget.

3. Transparent pricing

With EBLR, everything is out in the open. The benchmark rates are public, so you can see exactly how your interest rate is calculated.

4. Dynamic rates

EBLR’s linked loans vary every three months according to the benchmark rate, making your loan more susceptible to market changes than older systems.

Advantages of EBLR for Borrowers

EBLR has many advantages that make it a far better system than its predecessors:

1. Transparency: You know exactly how your interest rate is determined.

2. Fair pricing: Lenders can no longer set rates at their whim, so the playing field is level.

3. Quicker rate cuts: You feel it almost immediately when the RBI cuts rates.

4. Easier comparisons: Comparing loan offers from different financial institutions is much easier because of standardised benchmarks.

Disadvantages of EBLR

While EBLR is a step forward, it comes with its challenges:

1. Unpredictable EMI fluctuations: With changes in the benchmark rate, the EMIs tend to become erratic and challenging to budget for.

2. Rate hike impact: If the RBI hikes the rates, the borrower experiences an immediate hike in the loan cost.

3. The system: Some terms, such as “spread” and “external benchmark,” may overwhelm the reader.

How Does EBLR Impact Different Types of Loans?

1. Home loans

Most home loans are long-term. Therefore, the frequent rate changes under EBLR can significantly affect your overall interest costs. However, the transparent system makes it easier to plan your finances.

2. Auto loans

The impact of EBLR on auto loans is less pronounced but still felt. They will benefit only if rate cuts are made early in the loan’s tenure.

3. Personal loans

Personal loans linked to EBLR fluctuate more often, making them less predictable but more market-sensitive.

Broader Impact of EBLR

1. For borrowers

The EBLR meaning is about linking loan rates to external benchmarks and promoting transparency and fairness. Loan interest rates are also kept closer to market conditions; thus, borrowers benefit quickly if the rates are reduced.

2. For financial institutions

Financial institutions face the problem of less flexibility while setting the rate. Although this ensures fair pricing, it puts pressure on profit margins.

3. For the economy

EBLR enhances the potency of monetary policy since the variation in rate change will more efficiently transmit the change across the financial system. Therefore, the economy is more dynamic and responsive.

Final Thoughts

Tata Capital offers competitive EBLR-linked rates and a seamless loan borrowing experience that aligns with your financial goals. Whether you’re looking for personal, home, or business loans, Tata Capital provides tailored solutions with complete transparency. 

Visit the Tata Capital website or download the Tata Capital app to explore loan options and make informed financial decisions today!