External Benchmarks Lending Rate

• The report on ‘Monetary transmission in India’ has been released by the Reserve Bank of India.
• According to the report, the legacy of internal benchmark linked loans (BPLR, base rate, and MCLR) together comprised 71.5 percent of outstanding floating rate rupee loans as at end-March 2021, impeding the transmission.
• This increase in EBLR linked lending will contribute to significant improvement in monetary policy transmission.

Key points:

• The share of loans linked to MCLR stood at 62.9 per cent as of March 2021.
• Only 8.6 per cent of floating rate rupee loans were still linked to the BPLR and base rate even though the Reserve Bank had moved to MCLR based regime over five years ago.
• the share of outstanding loans linked to external benchmarks — mostly the Repo rate which is at four percent — increased from as low as 2.4 per cent during September 2019 to 28.5 per cent during March 2021, contributing to significant improvement in transmission on the back of persisting surplus liquidity conditions.
• The opacity in interest rate setting processes under internal benchmark regime hinders transmission to lending rates, although the EBLR regime is indirectly also leading to moderate improvement in transmission to MCLR based loan portfolio.
• An increasing share of outstanding loans linked to external benchmarks – more so for foreign banks followed by the private sector banks.

• Monetary transmission to all new loans sanctioned in respect of selected sectors where new floating rate loans have been linked to the external benchmark registered substantial improvement.

• Higher interest rates offered by competing saving instruments such as small saving schemes and debt mutual fund schemes have impeded transmission especially during the easing cycle.

Repo Rate:

• It is also known as the benchmark interest rate and is the rate at which the RBI lends money to the banks for a short term. Here, the central bank purchases security.

Marginal Cost of Lending Rate (MCLR):

• It is the minimum rate of interest with which a bank can lend.
• MCLR is an internal standard linked to tenor, meaning that the bank decides the rate directly based on the time left to repay a loan.
• It came into effect in April 2016.
• This rate is based on four components—the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.

Internal Benchmark Lending Rate (IBLR):

• The Internal Benchmark Lending Rates are a set of reference lending rates which are calculated after considering factors like the bank's current financial overview, deposits and non performing assets (NPAs) etc. BPLR, Base rate, MCLR are the examples of Internal Benchmark Lending Rate.

EBLR:

• To ensure complete transparency and standardization, RBI mandated the banks to adopt a uniform external benchmark within a loan category, effective 1st October, 2019.
• Unlike MCLR which was internal system for each bank, RBI has offered banks the options to choose from 4 external benchmarking mechanisms:

1. The RBI repo rate
2. The 91-day T-bill yield
3. The 182-day T-bill yield
4. Any other benchmark market interest rate as developed by the Financial Benchmarks India Pvt. Ltd.