Just a few hours after the Reserve Bank of India (RBI) announced a hike in the repo rate by 50 bps on August 5, ICICI Bank also announced that it has increased its external benchmark-based lending rates. As per the bank’s website, “RBI Policy Repo Rate effective August 5, 2022 is 5.40%. ICICI Bank External Benchmark Lending Rate” (I-EBLR) is referenced to RBI Policy Repo Rate with a mark-up over Repo Rate. I-EBLR is 9.10% p.a.p.m. effective August 5, 2022.”
With the hike in I-EBLR, your EMI outgo will also increase. If your home loan is linked to the I-EBLR and EMI for the month is yet to be deducted, then the bank will calculate the new EMI amount on the outstanding principal.
Here is an example of showing how much your EMI will rise post the latest hike in I-EBLR. Suppose you have taken a home loan of Rs 30 lakh. Earlier the I-EBLR was 8.60% and now with the hike in I-EBLR by 50 basis points, the new I-EBLR will be 9.10%.
|Loan amount (Rs)||30 lakh|
|Old I-EBLR (%)||8.60|
|Tenure (in years)||20|
|New I-EBLR (%)||9.10|
|New EMI (Rs)||27,185|
|Hike in EMI amount (Rs)
What is the external benchmark-based lending rate?
In September 2019, the RBI introduced a mechanism of linking all new floating rate personal or retail loans and floating rate loans to Micro and Small Enterprises to external benchmarks. This was done to ensure the effective transmission of changes in the key policy rates. It had been observed that internal benchmarks such as the Base rate/MCLR did not deliver effective transmission of monetary policy decisions.
As per the external benchmark-based lending rates, all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises shall be benchmarked to any one of the following:
- Reserve Bank of India policy repo rate
- Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
- Government of India 6-Months Treasury Bill yield published by the FBIL
- Any other benchmark market interest rate published by the FBIL.
The interest rate under an external benchmark shall be reset at least once in three months. Further, banks are free to decide the spread over the external benchmark. However, credit risk premium may undergo change only when the borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract. Further, other components of spread including operating cost could be altered once in three years.