How Using EBLR Can Lower Your Home Loan EMI

The Reserve Bank of India has left the policy rate unchanged at 6.50% for the sixth time in a row, dashing the hope of many loan borrowers who were expecting a rate cut and consequently, lower home loan rates.

Home loan borrowers constantly scan avenues to optimize their loan terms, particularly the interest rates.

A tool that has gained prominence in this regard is benchmarking the loan rate to an External Benchmark-Linked Rate (EBLR).

This rate offers numerous benefits to borrowers, ensuring their loans are more transparent and aligned with market trends.

This article looks into how home loan borrowers can use EBLR to their advantage, thereby making their borrowing terms more favorable and cost-effective.

Understanding EBLR

EBLR refers to a floating interest rate model that banks and financial institutions use to set the interest rates for loans.

Unlike the traditional internal benchmark rates, such as the Base Rate or the MCLR (Marginal Cost of funds based Lending Rate), EBLR is directly linked to an external benchmark.

Typical benchmarks include the repo rate set by the central bank, government securities yields, or any other market interest rate indicator.

The primary advantage of EBLR is its transparency and direct correlation with the broader economic conditions, ensuring that borrowers quickly gain from any reduction in lending rates. 

Benefits of Benchmarking Loan Rate to EBLR

1. Enhanced Transparency

One of the foremost advantages of EBLR is the enhanced transparency it offers. Borrowers can easily track the external benchmark movements, such as the repo rate changes by the central bank, to anticipate changes in their loan interest rates. This transparency ensures no surprises, and borrowers can plan their finances more effectively.

2. Quicker Transmission of Rate Cuts

With EBLR, any reduction in the benchmark rates is quickly reflected in the borrowers’ loan interest rates. This faster transmission ensures that borrowers can benefit from lower interest payments whenever there is an easing of monetary policy, thus leading to significant savings over the loan tenure.

3. Potential for Lower Interest Rates

Benchmarking loan rates to EBLR can lead to lower interest rates than those linked to internal benchmarks. As EBLR is influenced by market conditions and central bank policies aimed at controlling inflation and stimulating economic growth, borrowers may find themselves paying less in interest during periods of rate cuts.

4. Flexibility and Competitive Advantage

EBLR provides borrowers flexibility, as they can switch between lenders offering more favorable rates linked to the external benchmark. This feature ensures that financial institutions offer the best possible rates to retain or attract customers, ultimately benefiting the borrower.

5. Better Financial Planning

The predictability and transparency associated with EBLR enable borrowers to plan their finances better. Borrowers can make informed decisions about prepayments, knowing that their loan rates will adjust in line with the external benchmark refinancing, and accordingly adjust their investment allocation

Making the Most of EBLR

To truly benefit from EBLR, borrowers should stay informed about the economic indicators and policies affecting the external benchmarks.

Monitoring RBI’s announcements, economic trends, and market conditions helps borrowers anticipate changes in their loan interest rates.

Additionally, borrowers should regularly review their loan agreements and consider refinancing options if a significant benefit is observed due to the interest rate movements.

Benchmarking home loan rates to EBLR offers many benefits, ranging from enhanced transparency and quicker rate transmission to potential savings on interest payments.

It empowers borrowers to make well-informed financial decisions and take advantage of favorable market conditions.

As financial contours evolve, adapting to such innovative benchmarking mechanisms will be crucial for borrowers seeking to optimize their loan terms and achieve financial well-being. 


Can EBLR can be lower than MCLR?

The EBLR can, at times, be lower than the Marginal Cost of Funds based Lending Rate (MCLR) for several reasons, reflecting the differences in how these rates are calculated and what they are tied to:

1.      Link to Market Rates: EBLR is directly linked to external market benchmarks such as the repo rate, treasury bill rate, or other benchmarks published by Financial Benchmarks India Pvt Ltd (FBIL). These rates are generally more volatile but can be lower than the cost of funds for banks, especially in a decreasing interest rate environment. When the RBI reduces the repo rate, the EBLR can decrease more quickly than the MCLR, which is based on the banks' internal cost of funds.

2.    Responsiveness to Monetary Policy: The EBLR system is designed to ensure that the transmission of monetary policy is more direct and immediate. When the central bank changes policy rates, EBLR-adjusted loans reflect these changes more quickly than MCLR-based loans. In a scenario where the central bank is lowering rates to stimulate the economy, EBLR rates can decrease more swiftly, making them lower than MCLR rates which adjust with a lag.

3.    Calculation Components: The MCLR calculation includes several components such as the marginal cost of funds, operating costs, tenor premium, and negative carry on account of Cash Reserve Ratio (CRR). These components can keep the MCLR relatively high even when external benchmark rates decrease. In contrast, EBLR is more straightforwardly tied to external rates without the direct inclusion of these additional costs.

4.    Market Conditions: In periods of liquidity surplus or when the central bank is pursuing an accommodative monetary policy, market-determined rates like the repo rate tend to be lower to encourage borrowing and investment. Since EBLR is tied to these rates, it naturally becomes lower than MCLR, which might not immediately reflect such market conditions due to its calculation methodology.

5.    Banking Sector's Cost Structure: MCLR reflects the bank's internal cost structure, including the cost of raising new funds. If the banking sector experiences high operational costs or if the cost of deposits remains high, MCLR will not decrease as quickly as EBLR, which is less affected by these internal banking costs.

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