MCLR vs EBLR: How these two rate regimes impact borrowers and the economy

Marginal cost of funds lending rate or MCLR, and External benchmark lending rate (EBLR) are two rate regimes used by bankers in India to set borrowing rates for consumer loans. So, if you, as a consumer or simply a money manager of your family, want to understand how these regimes impact you and your money, here’s a quick take on these two regimes.

Here, only the incremental cost of funds is taken into account for deciding the borrowing rate.

The MCLR rate regime, based on the marginal cost of funds, is the internal benchmark employed by banks and fixed by the RBI. Pertinently, it is the minimum rate of interest on which the bankers can extend loans to consumers.

Generally, the RBI guidelines suggest that lenders cannot lend funds below the MCLR rate and hence the loan rate, including that for personal loans, is decided based on the incremental cost of arranging each rupee.

The external benchmark lending rate is the rate based on which interest rates for various floating loans, such as home loans etc., are determined.

This EBLR is generally pegged to the RBI’s repo rate; it also includes some bank-specific spread.

Now, assuming that the EBLR is 6.5% for a lender and it charges an additional spread of 50 basis points over and above the repo rate, then the floating rate on different loans can be over and above 7%.

The EBLR rate regime was introduced in October 2019.

Importantly, this EBLR is updated time and again to incorporate market uncertainties as well as borrower-linked risk premiums.

MCLR and EBLR rates of SBI, HDFC Bank, Axis Bank, ICICI and Bank of Baroda

The key difference in the two regimes is that borrowers are seen as better off if their loans are pegged to the EBLR rate regime, as it results in a quicker and more apt rate transmission, proving to be better in a falling interest rate scenario.

Also, in the EBLR regime, banks can only look for the spread and don’t have much say in the external rate.

How do EBLR and MCLR rates influence and impact the Indian economy?

The way any change in the repo rate is transmitted to borrowers will have a substantial bearing on the consumption and investment behaviour in the economy.

So, overall, for a quicker economic policy transmission that happens more in the case of floating rates, EBLR helps in quicker transmission, lowering end-user interest or EMIs, helping more credit uptake.

The easing rate cycle, hence, benefits and enables borrowers to reap the advantage of a growing economy.

Also, MSMEs that work as a growth engine are able to tap better and more competitive rates and secure easy, low-cost loans, thus supporting investment and growth.