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RBI Reforms Lending Rates, Shifts to External Benchmark
3 Aug
Summary
- RBI introduced MCLR in 2016 to set minimum lending rates
- MCLR replaced by EBLR in 2019 to make rate changes more responsive
- EBLR links lending rates to external benchmark like repo rate
As of August 4th, 2025, the Reserve Bank of India (RBI) has implemented significant reforms to the lending rate system in the country. In 2016, the RBI had introduced the Marginal Cost of Funds-based Lending Rate (MCLR) as an internal benchmark to set minimum lending rates for banks. This was done to increase transparency and responsiveness to RBI's rate changes.
However, in 2019, the RBI decided to move from this internal benchmark to an external benchmark, known as the External Benchmark Lending Rate (EBLR). The most common external benchmark used by banks is the repo rate, which is determined by the RBI. Banks now add their own spread to the repo rate to offer the final lending rate to customers.
This shift to an external benchmark was made to expedite the process of passing on any rate cut benefits to borrowers. Under the previous MCLR system, it would take banks a long time to offer lower rates to customers. With the EBLR, any changes in the repo rate are more quickly reflected in the lending rates for products like home loans, personal loans, and loans for micro, small, and medium enterprises.
