Finance Minister Nirmala Sitharaman on Friday, during a press conference, announced steps to be taken by banks for effective transmission of repo rate cuts to the home loan and car loan borrowers. In the past, it has often been witnessed that there is a time-lag and not a complete transmission of the repo cut by banks to the loan borrowers. Till April 2016, the lending rate used to be on the Base Rate of banks, but the industry moved on to the MCLR-linked loans after that. Based primarily on their own cost of funds, both Base Rate and MCLR are internal benchmarks of banks.
With the new structure in place, it seems now the lending will be based on an external benchmark such as the Reserve Bank of India's (RBI) repo rate. In such a case, the home loan will be called repo-rate linked lending rate (RLLR). The State Bank of India (SBI) has already launched RLLR loan and some of the other banks too have announced their RLLR loans.
In the RLLR loan, any change or revision in the repo rate by the RBI will be transmitted immediately and in entirety. Which means any uptick in the repo rate will hurt the borrowers from the coming month.
Planning to apply for RLLR loan, here are 5 features to look into:
EMI: The principal portion in an RLLR loan will remain the same all through the tenure, however, the interest portion will vary. In RLLR loan by the SBI, a minimum of 3 percent of principal loan amount needs to be paid every year equated in monthly installments subject to liquidation of the loan before borrower attains 70 years. The repayment of the actual principal will depend on the tenure of the loan and the amount.
Benchmarking: Unlike MCLR, the bank's own cost of funds will not be of much importance as far as benchmarking is concerned, in the RLLR home loan. The home loan interest rate in RLLR will be linked to bank's RLLR. As RLLR will depend on the RBI's repo rate, any revision will impact RLLR of the bank. Banks will lower the RLLR if RBI cuts repo rate and vice versa.
Re-set date: The impact of any revision n repo rate is immediate in RLLR home loan. Repo rate cut will result in saving in interest while an increase in rate will hurt.
Spread: The spread in the SBI RLLR is as per the loan amount and risk group of the borrower. SBI RLLR, effective September 1, 2019, is 7.65 percent and the spread is between 40 basis points and 110 basis points depending up on the amount of the loan and risk group.
Principal-Interest ratio: Unlike MCLR linked loans, principal repayments are higher in the initial years in RLLR home loan where the interest portion is high and then narrows over the course of the loan.