External Benchmarks Lending Rate
Part of: GS Prelims and GS – III- Economy
In News: In a recent RBI report on ‘Monetary transmission in India’, the share of outstanding loans linked to External Benchmarks Lending Rate (EBLR – like repo rate), increased from as low as 2.4% during September 2019 to 28.5% during March 2021.
About Internal Benchmark Lending rate (IBLR)
- Lenders usually have an internal rate, which is the benchmark rate. Interest rates on all loans are linked to it.
- For example, a lender’s benchmark rate is 6%.
- It would offer an auto loan 2% higher than the benchmark rate, which will be 8%.
- Similarly, it may provide personal loans at 8% higher than the benchmark rate or at 14%.
- Initially, RBI focused on making the benchmark rate transparent. It introduced different ways to calculate the benchmark rates which are as follows
|Benchmark Prime Lending Rate (BPLR)||
|Marginal Cost of Lending Rate (MCLR):||
What were the issues related to Internal Benchmark Lending Rates?
- The problem with the IBLR regime was that when RBI cut the repo and reverse repo rates, banks did not pass the full benefits to borrowers.
- Repo rate is the rate at which the RBI lends money to the banks for a short term. Here, the central bank purchases security.
- In the IBLR Linked Loans, the interest rate has many internal variables of Bank which prevented the smooth transmission of RBI’s Monetary Policy changes.
About External Benchmark Lending Rate (EBLR)
- RBI mandated the banks to adopt a uniform external benchmark within a loan category, effective 1st October, 2019.
- 4 external benchmarking mechanisms:
- The RBI repo rate
- The 91-day T-bill yield
- The 182-day T-bill yield
- Anny other benchmark market interest rate as developed by the Financial Benchmarks India Pvt. Ltd.
- Banks are free to decide the spread over the external benchmark. However, the interest rate must be reset as per the external benchmark at least once every three months.
- Significance: Faster Monetary Transmission + Transparency in Interest rates + Standardisation of fixing interest rate.
- 28.5% of outstanding loans were linked to EBLR during March 2021.
- However, still 71.5% of outstanding loans are Internal Benchmark Lending Rate (IBLR- like base rate and MCLR) linked loans, which continues to impede the monetary policy transmission.