With faster adjustments in lending rates, the EBLR system has quickened the pace of monetary policy transmission, the report said.
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DANISH SIDDIQUI
The persistence of loans linked to the marginal cost of funds-based lending rate (MLCR) and other legacy rates, which are based on internal benchmarks and have a longer reset period, act as an impediment to overall monetary policy transmission, according to the RBI’s monetary policy report (MPR)
As at December-end 2024, the share of MCLR and other legacy rates (benchmark prime lending rate, base rate and other internal benchmarks) in the total outstanding floating rate of loans of scheduled commercial banks (SCBs) was at 39.4 per cent (43.4 per cent as at March-end 2024).
“There is still a significant proportion of loans linked to MCLR in the case of public sector banks (PSBs). The share of external benchmark-based lending rate (EBLR) -linked loans is higher in private banks (PVBs),” stated the MPR.
The report noted that after reduction in the policy repo rate by 25 basis points (bps) in February 2025 from 6.50 per cent to 6.25 per cent, banks adjusted their repo-linked lending rates downward by a similar magnitude. In contrast, the MCLR, that has a longer reset period and is linked to the cost of funds, may undergo adjustments with some lag.
Consequently, the WALR (weighted average lending rate) on outstanding rupee loans declined 7 bps. In the case of fresh loans, however, it has increased 8 bps during February 2025 reflecting significant proportion of MCLR-linked loans in it. One basis point equals one-hundredth of a percentage point.
The share of the external benchmark-based lending rate (EBLR)-linked loans in total outstanding floating rate loans of SCBs increased to 60.6 per cent at end-December 2024 from 56.6 per cent at end-March 2024. This is based on data from 73 SCBs.
With faster adjustments in lending rates, the EBLR system has quickened the pace of monetary policy transmission, the report said.
MCLR & EBLR
The MCLR regime replaced the base rate lending regime for all floating rate rupee loans from April 1, 2016 to ensure better transmission of repo rate changes into the lending rates. The MCLR comprises marginal cost of funds; negative carry on account of cash reserve ratio; operating costs; and tenor premium,
Further, the RBI brought in the EBLR-based lending regime in 2019 to quicken the pace of monetary policy transmission. So, all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans extended by banks to micro and small enterprises from October 01, 2019 and floating rate loans to medium enterprises from April 01, 2020 are mostly benchmarked to the repo rate. There are other external benchmarks too such as 3-months and 6-months Treasury Bill rate.
Transmission to lending rates reached its peak in H1 (April-September):2024-25 before adjusting downwards thereafter on account of competition among banks to retain market share by reducing the spread, per the MPR. On the other hand, deposit rates have been increasing in the wake of tighter liquidity conditions and higher credit demand.
In response to the cumulative 250-basis points (bps) rate hike during the recent tightening cycle, — May 2022 (4.00 per cent) to January 2025 (6.50 per cent), the 1-year median MCLR of SCBs increased by 178 bps. Consequently, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans increased by 181 bps and 115 bps, respectively, during this period.
On deposit side, the weighted average domestic term deposit rates (WADTDRs) on fresh and outstanding deposits increased by 253 bps and 199 bps, respectively, during the same period.
Published on April 10, 2025
