Floating Interest Rates | ABM Module C Ch 17 Pt 3 CAIIB

February 20, 2025

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Ever wondered how banks decide loan limits, ensure credit discipline, and apply floating interest rates to long-term advances? If you’re preparing for CAIIB’s ABM Module C in 2026, understanding credit management, loan delivery systems, and floating interest rates is crucial. This video is part 3 of our detailed series, where we break down essential loan structuring concepts, RBI guidelines, and how banks classify working capital limits using fixed and floating interest rates.

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Banking professionals preparing for CAIIB/JAIIB exams in 2026
Finance enthusiasts wanting deeper insights into loan management
Business owners seeking clarity on bank credit facilities

What you’ll learn in this video:

How banks structure loans (CC Limit vs. Term Loan)
RBI guidelines for large borrowers (₹150 Cr+ working capital)
Cash credit facility exclusions & bifurcation rules
Interest rate benchmarks (MCLR vs. EBLR)
Comparison of fixed and floating interest rates
How banks determine capital market exposure limits

🔔 Watch the full breakdown below:

🏦 Understanding Loan Systems for Bank Credit

📌 Loan Structure & RBI Guidelines

When banks sanction a loan, it’s not just about transferring money. A structured approach is followed to maintain financial discipline. For large borrowers (₹150 Cr+), RBI mandates that at least 60% of the sanctioned amount must be taken as a working capital term loan. This term loan portion is typically priced using floating interest rates linked to either MCLR or EBLR, depending on the borrower category. The remaining 40% can be availed as a cash credit limit, giving the borrower operational flexibility for day-to-day working capital requirements.

🚫 Exclusions in Loan Structuring

Pre-shipment & Post-shipment Credit (Export credit limits)
Bill limits for inland sales
Commercial Papers (CPs) – Unsecured money market instruments used for short-term funding

These exclusions are important because they are governed by separate RBI norms and are not subject to the 60:40 bifurcation rule applicable to standard working capital limits.

📊 Interest Rates on Advances – MCLR vs. EBLR

🏦 What is MCLR?

MCLR (Marginal Cost of Funds Based Lending Rate) was introduced in April 2016 to ensure monetary policy benefits reach borrowers. Under MCLR, banks reset rates at defined intervals (monthly, quarterly, half-yearly, or annually), which means changes in repo rate transmission to borrowers happen with some delay. Most MCLR-linked loans operate on floating interest rates that adjust at the reset date.

📌 Understanding EBLR & Its Impact

Feature	MCLR	EBLR
Benchmark	Internal (Bank decided)	External (Market-driven)
Speed of Rate Change	Slow	Immediate
Customer Benefit	Delayed	Faster

EBLR (External Benchmark Lending Rate) was mandated by RBI for retail and MSME floating-rate loans to improve monetary policy transmission. Common external benchmarks include the RBI repo rate, 3-month T-Bill yield, or 6-month T-Bill yield. Under EBLR, floating interest rates change quickly, passing on repo rate revisions to borrowers within the reset cycle (usually 3 months).

🏡 Fixed vs. Floating Interest Rates: Which is Better?

📌 Fixed Interest Rates

Predictable EMI payments throughout the loan tenure
Higher initial rates than floating interest rates
Beneficial in times of rising interest rates
Preferred by borrowers who want budgeting certainty