What EBLR and MCLR mean and how your home loan and personal loan are affected by changes in these rates
What is MCLR?
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What is EBLR?
When you take a loan from a bank, it charges an interest rate. This rate is linked to a base or reference rate, which is called the benchmark rate. The banks add a premium or a markup on this benchmark rate to price various financial products like home loans and personal loans In 2016, the Reserve Bank of India (RBI) introduced an internal lending rate, called the marginal cost of funds-based lending rate (MCLR), to decide the minimum rates beyond which the banks would not lend to customers. The MCLR was decided by the bank on the basis of its internal cost of funds, operating costs, etc., and loans were extended to customers by adding a spread or mark-up to the MCLR.This was done to introduce greater transparency and make the rate changes by RBI more responsive for customers. It replaced the earlier Base Rate system, which had been introduced in 2010 to decide the minimum lending rates for banks. The Base itself had replaced the Benchmark Prime Lending Rate, which had been used before 2010.Though MCLR was replaced in 2019, it is still being used for mortgage products taken before this period.The External Benchmark Lending Rate (EBLR) is the current benchmark that is being used by banks in the country to decide the lending rates for floating interest rate loans.In 2019, the RBI decided to move from its earlier internal benchmark rate to the external rate for floating rate retail loans like home loans, personal loans and those for micro, small and medium enterprises (MSMEs).The external benchmark most commonly used by banks is the repo rate, which is determined by the RBI. The banks add their spread and offer the lending rate to customers. For instance, if the repo rate being 6% and the bank's spread is 2%, then the floating rate for your home loan would be 8%.The decision to move from an internal to external rate was made to fasten the process of transferring any rate cut benefits to customers and make the system more transparent. This meant that if the repo rate dropped, the lending rate for home loans would also fall, reducing the EMIs for customers. With earlier rate systems, it would take the banks very long to offer the lower rates to borrowers.
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