Merits and Demerits of EBLR

Merits and Demerits of EBLR

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After the presentation of MCLR, RBI had some glaring misgivings about the execution of MCLR by banks. As a result, the RBI established the Janak Raj Committee. The Janak Raj Committee released a number of intriguing findings, which are listed below.

1. Not all banks transferred loans from BRR to MCLR. Some loans are still subject to the BRR regime, and banks are making more money from them.

2. In the past, the MCLR rate was frequently recalculated. However, many banks used to only revise the MCLR once every six months or every twelve months.

3. Banks may revise their MCLR in December 2019 if the RBI reduces its rate in January 2019 and banks follow the annual MCLR revision. The borrower will not be immediately affected by the January 2019 reduction in MCLR. As a result, effective policy implementation is significantly behind schedule.

As a result, taking into account all of these factors, the Committee suggested using an external benchmark lending rate rather than having banks set their own benchmark internally. With effect from October 1, 2019, all loans will be subject to the external benchmark lending rate because of this.

Benefits of External Benchmark Lending Rates

• Your lending rate typically changes every three months at the very least. This was not the situation with MCLR system as banks set their own terms to change the loan costs.

• Monetary Transmission is effective, and lending rates are transparent.

The disadvantages of external benchmark lending rates include the high volatility of the benchmark rates. Consequently, be prepared to process the successive change in your loaning rates.

• Lending money typically results in interest for banks. When someone books an FD with the bank, the interest must also be paid by the bank. Every bank tries to make more money than they give to depositors. Net Interest Margin refers to the difference between earned and paid interest.

• The fear that banks have is that their interest earnings will be volatile and that their cost of borrowing will remain constant. As a result, their Net Interest Margin may be affected.

If you read the entire post, you might have noticed that even the RBI is unsure of how to improve financial communication and transparency. It is still in the mode of trial and error. As a result, anticipating a significant change solely as a result of setting an external benchmark lending rate is not a solution.