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What is EBLR and Its Impact on Loan Interest Rate?

By Tata Capital
30 December 2025
8 mins read
2126

You’ve probably heard of the EBLR rate if you’ve ever taken out a loan or intend to do so. The EBLR full form is External Benchmark Linked Rate, which may sound complex, but it’s changing how financial institutions determine the interest rates on your loans. So, what is EBLR? Why was it implemented? More importantly – how does it affect you, the borrower?

What is EBLR?

EBLR rate refers to the loan interest rate mechanism in which the interest rate is pegged with an external benchmark instead of an internal computation. Before EBLR, financial institutions computed the loan interest rates using internal benchmarks such as MCLR (Marginal Cost of Funds Lending Rate) or the base rate. The drawback of such methods is that they lack transparency and do not reflect changes in market conditions at the right time.

Under the EBLR, loan interest rates are benchmarked on a publicly accessible, market-derived benchmark.

Such standard benchmarks can be:

Repo rate is the interest rate RBI lends to commercial financial institutions.
91-day or 182-day treasury bill yields are short-term central government securities.
External benchmarks approved by RBI.

Thus, your interest rate on loans will be given as follows.

Loan Interest Rate = External Benchmark + Spread

The spread is an additional percentage the lenders charge to account for their cost, risk, and profit margin. The benchmark rate varies depending on market conditions, so the interest rate for your loan would change accordingly.

Why was EBLR Introduced?

Before EBLR, the borrowers complained that the financial institutions were taking time to transmit the rate cuts announced by the RBI. That is when the RBI used to cut the rates to reduce the cost of borrowing, the lenders would be slow to pass on the benefits to the customers.

The RBI introduced EBLR in October 2019 with the following objectives:

Transparency: The interest rates charged to the borrowers should be transparent and understandable.
Instant transmission of the rate: Transfer the change in RBI rate almost immediately into loan rates.
Uniformity: Uniformise the financing system.

EBLR aimed to streamline the lending process, making it borrower-friendly and consistent with market requirements.

How Does EBLR Work?

Here is how EBLR affects your loan interest rate:

Instant reaction to a rate change

Upon the RBI’s repo rate cut, some lenders with loans directly tied to this benchmark automatically transfer the reduction to the debtors. That means reduced home loan interest rates and smaller EMIs for you.

Higher volatility

The flip side is that your loan interest rate will increase immediately when the benchmark rate rises. Your EMIs may increase, which can affect your monthly budget.

Transparent pricing

With EBLR, everything is out in the open. The benchmark rates are public, so you can see exactly how your interest rate is calculated.

Dynamic rates

EBLR’s linked loans vary every three months according to the benchmark rate, making your loan more susceptible to market changes than older systems.

Advantages of EBLR for Borrowers

EBLR has many advantages that make it a far better system than its predecessors:

Transparency: You know exactly how your interest rate is determined.
Fair pricing: Lenders can no longer set rates at their whim, so the playing field is level.
Quicker rate cuts: You feel it almost immediately when the RBI cuts rates.
Easier comparisons: Comparing loan offers from different financial institutions is much easier because of standardised benchmarks.

Disadvantages of EBLR

While EBLR is a step forward, it comes with its challenges:

Unpredictable EMI fluctuations: With changes in the benchmark rate, the EMIs tend to become erratic and challenging to budget for.
Rate hike impact: If the RBI hikes the rates, the borrower experiences an immediate hike in the loan cost.
The system: Some terms, such as “spread” and “external benchmark,” may overwhelm the reader.

How Does EBLR Impact Different Types of Loans?

1. Home loans

Most home loans are long-term. Therefore, the frequent rate changes under EBLR can significantly affect your overall interest costs. However, the transparent system makes it easier to plan your finances.

2. Auto loans

The impact of EBLR on auto loans is less pronounced but still felt. They will benefit only if rate cuts are made early in the loan’s tenure.

3. Personal loans

Personal loans linked to EBLR fluctuate more often, making them less predictable but more market-sensitive.

Broader Impact of EBLR

1. For borrowers

The EBLR meaning is about linking loan rates to external benchmarks and promoting transparency and fairness. Loan interest rates are also kept closer to market conditions; thus, borrowers benefit quickly if the rates are reduced.

2. For financial institutions

Financial institutions face the problem of less flexibility while setting the rate. Although this ensures fair pricing, it puts pressure on profit margins.

3. For the economy

EBLR enhances the potency of monetary policy since the variation in rate change will more efficiently transmit the change across the financial system. Therefore, the economy is more dynamic and responsive.

Factors Affecting EBLR

Several factors influence changes in the EBLR rate.

Monetary Policy: RBI decisions, especially changes in the repo rate, directly affect EBLR. When the repo rate rises, loan interest rates increase which makes loans costlier. A decrease or cut in the repo rate lowers EBLR, therefore reducing EMIs.
Market Conditions: Inflation levels, economic growth, and liquidity in the market affect EBLR. High inflation might cause higher rates, whereas strong growth and liquidity can result in lower lending rates.
Global Events: Fluctuations in oil price, geopolitical tensions, and global crises can increase inflation and influence RBI policy, which can indirectly affect EBLR.
Bank-Specific Factors: Each bank’s costs, profit targets, and risk approach determine the spread added to EBLR, which can raise or lower loan rates. Borrowers should compare banks before choosing a loan.

How Is EBLR Calculated?

EBLR interest rate is calculated using a simple formula:
EBLR rate = External Benchmark Rate + Spread + Credit Risk Premium

The external benchmark rate is the base reference rate, which can include RBI’s repo rate or benchmarks published by FBIL. The spread is a fixed margin that financial institutions add to cover their operating costs and ensure profits. The credit risk premium is an extra charge based on the borrower’s credit score, type of loan, and repayment history.

This system ensures that when the RBI changes its repo rate or other benchmarks, loan interest rates also change, affecting EMIs. For example, if the repo rate is 5.50%, the spread is 2.0%, and the credit risk premium is 0.5%, the EBLR becomes 8.00% per annum.

Challenges of EBLR for Borrowers

Rate Volatility: EBLR is linked to benchmarks such as the RBI repo rate, so even small policy changes can cause changes in loan interest rates.
Fluctuating EMIs: Since interest rates can change multiple times a year, EMIs are not fixed and may increase or decrease over the loan period.
Uncertain Long-Term Costs: Borrowers cannot have an accurate estimation of the total interest payable over time, making long-term financial planning difficult.
Variable Credit Risk Premium: Banks may change the credit risk premium based on credit score or repayment history, which can unexpectedly increase the cost of the loan.

How to choose a home loan with EBLR?

To choose a home loan linked to EBLR, an important point to consider is how sensitive it is to changes in the repo rate. Since EBLR loans are directly linked to revisions in the repo rate, any increase can immediately raise your interest rate and EMI.

For instance, a loan taken when repo rates are low may seem affordable initially, but rising rates can increase monthly finances significantly. Borrowers should assess their ability to pay higher EMIs, keep an emergency buffer, and plan for possible prepayments. An EBLR-linked loan would work best for those who have a stable income and enough financial flexibility to keep up with the changing interest rates.

Common External Benchmarks Used for EBLR

In India, banks are allowed to connect EBLR-linked loans to a set of approved benchmarks, such as:

Repo Rate: The rate at which the Reserve Bank of India lends funds to commercial banks.
3-Month Treasury Bill Yield: This is published by Financial Benchmarks India Pvt. Ltd. (FBIL).
6-Month Treasury Bill Yield: This is also published by FBIL.
Any other benchmark rate published by FBIL

EBLR vs. MCLR: Key differences

If you are repaying a home loan linked to MCLR, switching to an EBLR-based loan may offer benefits. EBLR is linked to external benchmarks like the RBI repo rate, which allows faster transmission of policy rate changes. This can lead to quicker interest rate reductions, greater transparency, and potential savings.

Aspect	MCLR	EBLR
Rate Linkage	Internal benchmark	RBI repo rate or other external benchmark
Rate Transmission	Slower	Faster
Transparency	Limited	High
Rate Changes	Less frequent	More frequent
Cost to Switch	Not applicable	Conversion fee may apply

Conclusion

Tata Capital offers competitive EBLR-linked rates and a seamless loan borrowing experience that aligns with your financial goals. Whether you’re looking for personal, home, or business loans, Tata Capital provides tailored solutions with complete transparency. Visit the Tata Capital website or download the Tata Capital app to explore loan options and make informed financial decisions today!

FAQs

What is EBLR in a loan?

EBLR (External Benchmark Linked Rate) links the interest rate of loans with market-linked benchmarks such as the repo rate from RBI. The EBLR meaning emphasises transparency and enables faster rate revisions.

What are the disadvantages of EBLR?

EBLR results in varying EMIs because the benchmark rate keeps changing, making financial planning challenging during times of rate rise.

What is the benefit of an external benchmark lending rate?

EBLR ensures faster rate transmission, aligns loans with market conditions, and enhances transparency, which benefits borrowers with fairer and more responsive interest rates.

Can I switch from MCLR to EBLR?

Yes, switching from an MCLR-linked loan to EBLR is possible and may offer benefits like quicker interest rate reductions and greater transparency. However, you should note that a conversion fee may apply when making this change.

Is EBLR better than fixed rates?

EBLR offers the advantage of quicker rate cuts and instant transmission of policy changes. However, its dynamic rates result in higher volatility and unpredictable EMI fluctuations, which can make long-term budgeting challenging. EBLR is best for those with financial flexibility.

Where can I avail of EBLR-linked loans?

You can avail of EBLR-linked loans from financial institutions such as Tata Capital. They offer personal, home, and business loans linked to competitive EBLR rates and provide a great borrowing experience. You can explore these loan options by visiting the Tata Capital website or downloading their app.

Which types of loans are linked to EBLR?

Various types of loans such as home loans, personal loans and business loans are linked to EBLR. The EBLR interest rate mechanism was established to replace older internal benchmarks like MCLR for greater transparency and faster rate transmission.

Do all loans come under the EBLR?

No, all loans do not come under EBLR. Major and MSME retail loans fall under EBLR, according to the RBI guidelines. The EBLR interest rate mechanism was implemented to replace older internal benchmarks like MCLR for greater transparency and faster rate transmission.

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