MCLR and EBLR

What is MCLR and EBLR?

News: External Benchmark Lending Rates (EBLR) now dominate the mix of outstanding floating rate loans, with their share rising to 48.3% by December 2022, while the share of those based on marginal cost of fund-based lending rate (MCLR) eased to 46%.

What is MCLR?
MCLR stands for Marginal Cost of Funds based Lending Rate. A bank determines its minimum interest rate by considering factors such as its cost of funds, operating costs, and profit margin. Banks use MCLR to calculate the interest rate on various loans, including home loans.

What is EBLR?
External Benchmark-linked Lending Rate (EBLR) ensures better transmission of policy rate changes. In case of a repo rate cut, banks have to pass on the entire benefit to borrowers.

What are the difference between EBLR and MCLR? 
 

What will the impact of RBI’s recent rate hike pause mean for EMI’s?
 As the repo rate remains at 6.5%, EBLR linked to the repo rate will not increase.
 For borrowers with existing home loans, the pause in a rate hike means EMI’s are likely to remain stable in the short term.

How can borrowers reduce the impact of higher external benchmark lending rates? (Important from Prelims perspective)
 The borrower can switch to a lender that offers a lower spread or margin over the external benchmark rate, after comparing the costs and benefits of refinancing.
 Increasing the tenure of the loan to reduce the EMI amount, if possible.
 Making partial prepayments and getting the EMI adjusted, if there is no prepayment penalty.
 Negotiating with the existing lender to reduce the spread or margin over the external benchmark rate, if the borrower has a good credit score and repayment history.
Source – The Hindu Businessline 

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