What is EBLR and How Does it Impact Your Home Loan?

Interest rates play a critical role in determining the cost of loans, and for Indian borrowers, the shift to External Benchmark Lending Rate (EBLR) has been a game-changer. According to the Reserve Bank of India (RBI), over 90% of new floating-rate loans issued by banks since 2019 are linked to EBLR, making it the dominant lending rate system.

But what does this mean for homebuyers and other borrowers? If RBI cuts the repo rate by 1%, your home loan EMI could decrease by ₹3,000 per month on a ₹50 lakh loan, saving you over ₹7 lakh in total interest. Conversely, when RBI hikes rates, your EMI rises almost instantly.

This blog will break down what EBLR is, how it works, and how it affects home loans and other borrowing costs. 

EBLR Full Form and Definition

EBLR stands for External Benchmark Lending Rate. It is the interest rate framework used by banks in India, where loan rates are directly linked to an external benchmark set by the Reserve Bank of India (RBI) or other financial authorities.

Before EBLR, banks followed the Marginal Cost of Funds-Based Lending Rate (MCLR) and the Base Rate system, which often delayed the transmission of rate cuts to borrowers. With EBLR, any change in the benchmark rate directly impacts loan interest rates, ensuring greater transparency and faster rate transmission.

Common External Benchmarks Used for EBLR

Banks in India can link their lending rates to one of the following external benchmarks:

• Repo Rate – The rate at which RBI lends money to banks
• 3-month Treasury Bill Yield published by Financial Benchmarks India Pvt. Ltd. (FBIL)
• 6-month Treasury Bill Yield published by FBIL
• Any other benchmark published by FBIL

How Does EBLR Work?

Banks set their lending rates as:

EBLR = External Benchmark Rate + Spread + Credit Risk Premium

• External Benchmark Rate: This is the base rate set by RBI or FBIL.
• Spread: Banks add a fixed margin to cover operational costs.
• Credit Risk Premium: This depends on the borrower’s credit profile, loan type, and repayment capacity.

Example Calculation of EBLR

Let’s say a bank follows the repo rate as its external benchmark. If:

• Repo Rate = 6.00%
• Bank’s Spread = 2.0%
• Credit Risk Premium = 0.5%

Then, the EBLR for a borrower would be:
 

6.00% + 2.0% + 0.5% = 8.50% per annum

Impact of EBLR on Home Loans

EBLR plays a significant role in determining home loan interest rates. Since home loans typically have a long tenure, even a small change in EBLR can lead to substantial differences in total interest paid.

Example: EBLR’s Effect on Home Loan EMI

Scenario 1: Higher Repo Rate

• Loan Amount: ₹50 lakh
• Loan Tenure: 20 years
• EBLR-based Interest Rate: 8.5%
• EMI: ₹43,391 per month
• Total Interest Paid: ₹54.1 lakh

Scenario 2: Repo Rate Cut by RBI

• New Repo Rate: 6.0%
• New EBLR-based Interest Rate: 7.5%
• New EMI: ₹40,280 per month
• New Total Interest Paid: ₹46.6 lakh

Impact: A 1% reduction in EBLR lowers the EMI by ₹3,111 per month and saves ₹7.5 lakh in interest over 20 years.

Advantages of EBLR for Borrowers

• Faster Interest Rate Adjustments – Loan rates change within 3 months of RBI policy updates.
• Greater Transparency – No hidden calculations; rates are directly linked to public benchmarks.
• Better Savings – If RBI reduces rates, borrowers benefit immediately.
• Encourages Competition – Banks compete to offer the lowest spreads.

Disadvantages of EBLR for Borrowers

• Higher Rate Volatility – Frequent rate changes can make EMIs unpredictable.
• No Control Over RBI’s Decisions – Borrowers cannot influence benchmark changes.
• Credit Risk Premium Can Vary – Interest rates may differ based on creditworthiness.