MCLR, EBLR and Bank Lending Rates – Notes with PYQs

When the RBI cuts the repo rate, people expect their home and car loan EMIs to fall. But for many years, banks were slow to pass on rate cuts. To fix this, the RBI changed the way banks set their lending rates several times - from BPLR to Base Rate, then MCLR, and finally the External Benchmark Lending Rate (EBLR). Exams ask about these systems, their years and how they work. This post explains them in simple words. It ends with 15 previous year questions.

1. What is monetary transmission?

Monetary transmission means how quickly a change in the RBI's policy rate (repo rate) reaches the interest rates that people and businesses pay on loans and earn on deposits. If transmission is slow, the RBI's policy does not work as intended. Each change in the lending rate system tried to make transmission faster and more transparent.

2. BPLR (2003)

• Each bank set its own Benchmark Prime Lending Rate.
• Banks could lend below BPLR to big companies, while charging small borrowers more.
• The system was not transparent, and rate cuts did not reach borrowers well.

3. Base Rate (2010)

• Introduced in July 2010, on the advice of the Deepak Mohanty working group.
• The Base Rate was the minimum rate below which banks generally could not lend.
• It was based on the average cost of funds, so it changed slowly when rates fell.

4. MCLR (2016)

From 1 April 2016, banks moved to the Marginal Cost of Funds based Lending Rate. It uses the marginal (latest) cost of funds instead of the average, so it reacts faster.

MCLR is built from four parts:

1. Marginal cost of funds - the cost of new deposits and borrowings.
2. Negative carry on CRR - the cost of keeping cash with the RBI that earns no interest.
3. Operating costs of the bank.
4. Tenor premium - a higher rate for longer loan periods.

Banks publish MCLR for different tenors, such as overnight, one month and one year. Still, transmission remained slower than the RBI wanted, because banks control their own costs.

5. External Benchmark Lending Rate (EBLR, 2019)

From 1 October 2019, the RBI required banks to link all new floating-rate loans to individuals (such as home and car loans) and to micro and small enterprises to an external benchmark. Banks can choose:

• The RBI repo rate - chosen by most banks (often called the Repo Linked Lending Rate, RLLR).
• The 3-month or 6-month Treasury Bill yield published by Financial Benchmarks India Ltd (FBIL).
• Any other benchmark yield published by FBIL.

The interest rate = external benchmark + spread. The rate must be reset at least once in three months. The spread can change only if the borrower's credit risk changes significantly.

6. Comparing the systems

7. What it means for borrowers

• With EBLR, when the RBI cuts or raises the repo rate, the loan rate changes within three months.
• Old loans on Base Rate or MCLR can usually be switched to EBLR, sometimes with a fee.
• Borrowers benefit quickly from rate cuts, but EMIs also rise quickly when rates go up.

8. Previous year questions

1. What does MCLR stand for? – Marginal Cost of Funds based Lending Rate
2. From when did MCLR come into effect? – 1 April 2016
3. In which year was the Base Rate system introduced? – 2010
4. Which working group recommended the Base Rate? – Deepak Mohanty group
5. From which year was BPLR used? – 2003
6. From when are new floating retail loans linked to an external benchmark? – 1 October 2019
7. Which external benchmark do most banks use? – Repo rate
8. How often must EBLR-linked loans be reset at least? – Once every three months
9. Which body publishes benchmark T-bill yields used for EBLR? – Financial Benchmarks India Ltd (FBIL)
10. Name one component of MCLR. – Marginal cost of funds (also negative carry on CRR, operating costs, tenor premium)
11. What is the cost of keeping CRR with the RBI called in MCLR? – Negative carry on CRR
12. What does monetary transmission mean? – Passing on policy rate changes to loan and deposit rates
13. Under EBLR, the loan rate equals the benchmark plus what? – Spread
14. When can the spread under EBLR change? – When the borrower's credit risk changes significantly
15. What is a Repo Linked Lending Rate? – A loan rate linked to the RBI repo rate

9. How to revise this topic

Start with the idea: monetary transmission - passing on repo rate changes to borrowers.

Next, learn the timeline: BPLR 2003, Base Rate July 2010 (Deepak Mohanty), MCLR 1 April 2016, EBLR 1 October 2019.

Then fix MCLR's four parts: marginal cost of funds, negative carry on CRR, operating costs, tenor premium.

Finally, remember EBLR: repo rate or FBIL T-bill yields, rate = benchmark + spread, reset at least every three months, spread changes only with credit risk.

10. Frequently Asked Questions

What is MCLR?

MCLR, or Marginal Cost of Funds based Lending Rate, is a system for setting bank lending rates, used from 1 April 2016. It is based on the marginal cost of funds, CRR cost, operating costs and a tenor premium.

What is EBLR?

EBLR, or External Benchmark Lending Rate, links loan rates to an outside benchmark such as the RBI repo rate. It has applied to new floating-rate retail and MSE loans since 1 October 2019.

Why did the RBI move from MCLR to EBLR?

Under MCLR, banks were slow to pass on repo rate cuts. Linking loans directly to an external benchmark makes changes reach borrowers faster and more transparently.

How often does an EBLR loan rate change?

Under RBI rules, the interest rate on an EBLR-linked loan must be reset at least once every three months.

Can I switch my old MCLR loan to EBLR?

Usually yes. Banks allow borrowers on Base Rate or MCLR to switch to an external benchmark, sometimes with a small fee.

For more Economy topics in simple language, see our Monetary Policy, Repo, CRR and SLR, RBI and its Functions and Basel Norms posts, or browse the Economy section. Preparing for a bank exam? Start with the RBI Grade B guide or join the 100 Hour GS Course.