MCLR vs EBLR Transmission
MCLR (Marginal Cost of Funds-based Lending Rate) and EBLR (External Benchmark-based Lending Rate) are two loan pricing frameworks in India that differ fundamentally in how quickly policy rate changes are passed on to borrowers, with EBLR offering near-instantaneous transmission and MCLR transmitting with a lag of up to one year.
Before 2016, Indian banks used the Base Rate system, which was opaque and transmitted monetary policy poorly. RBI replaced it with MCLR in April 2016 — a formula-linked rate based on the bank's marginal cost of funds, tenor premium, operating costs, and a negative carry on CRR. While more transparent than the base rate, MCLR still allowed banks to delay transmission because the rate reset for a given loan only happened at annual intervals (reset period), even if MCLR itself changed monthly.
To address this structural stickiness, RBI from October 2019 mandated that all new floating-rate retail and MSME loans be benchmarked to an external benchmark — either the RBI repo rate, the 3-month or 6-month Treasury Bill rate, or any other benchmark published by FBIL. Banks add a spread over this external benchmark to arrive at the final lending rate. This spread is fixed at origination and can only be revised when the borrower's credit risk profile changes or at 3-year intervals.
The transmission difference is stark. During the 2022-23 rate hike cycle, EBLR-linked loans repriced fully within a quarter of each rate hike, raising EMIs or extending tenors for millions of home loan borrowers. MCLR-linked loans, which still constitute a large stock of outstanding corporate and older retail loans, took much longer — a borrower on a 1-year MCLR reset cycle could have been insulated from rate hikes for up to 12 months.
From a customer impact perspective, EBLR creates greater uncertainty in EMI during rate cycles. When repo rates rise by 250 basis points as they did in FY23, a Rs 50 lakh home loan EMI on a 20-year tenor could increase by Rs 5,000-7,000 per month, or the tenure could extend by several years. Conversely, when rates fall, EBLR borrowers benefit immediately.
For banks, the EBLR framework creates an asset-liability management challenge. The liability side — deposits — does not reprice as quickly as EBLR assets, creating basis risk and NIM volatility. Banks with a higher share of EBLR loans in their book saw sharper NIM expansion during the hiking cycle and face faster compression as rates ease. RBI's periodic studies on monetary policy transmission use MCLR and EBLR data to assess the efficacy of rate actions in the real economy.