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How Would RBI’s Decision to Keep Repo Rate as Benchmark Impact Floating Loans?

Highlights

  • Repo rate amongst the benchmarks for interest rate from April 1 2019.
  • Check out the impact of repo rate on floating rate based loans

The Reserve Bank of India (RBI), in its monetary policy held in December 2018, has made an important announcement directing banks to price floating rate loans on the basis of external benchmarks such as the repo rate, 91-day T-Bill Yield, 182-day T-Bill Yield and any other benchmarks of Financial Benchmarks of India Limited (FBIL), from April 1, 2019. As of now, banks are pricing floating loans on the basis of internal benchmarks such as the Marginal Cost of Lending Rate (MCLR), base rate, Retail Prime Lending Rate (RPLR), etc. 

The spread marked over any of the external benchmarks would remain fixed throughout the course of a loan unless the credit profile of the customers undergo a significant change and as agreed upon the loan contract. The decision would impact all floating rate loans including home loans, loan against property, auto loan, etc. if experts are to be believed.

However, before checking the impacts of the proposed move, let’s quickly get into an interesting development that has taken place with regards to external benchmarks.

SBI Links Overdraft, Cash Credit & Savings Account to Repo Rate

Although banks seemed reluctant to implement the proposed guideline, the apex bank through its discussions with both public and private lenders has somewhat convinced them to follow external benchmarks. The effect of the talks is that the country’s largest lender State Bank of India (SBI) has announced that it will price all cash credit and overdraft accounts exceeding ₹1 lakh at 2.25% over the repo rate, which currently stands at 6.25% from May 1, 2019. This results in the floor rate of 8.50% over which the bank will charge risk premium depending on the overall credit profile of an applicant.

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Comparison of Interest Rates on SBI Lending Products Based on the Existing MCLR and the Proposed Repo Rate

Lending ProductsInterest Rate at MCLR for Unsecured Products (In % p.a.)Interest Rate for Products Offered Against Fixed Deposit (In % p.a.)Proposed Interest Rate Based on Repo Rate (In % p.a.)
Overdraft12.55%-15.55%6.75%-8.35%8.50% + Risk Premium
Cash Credit Depends on the loan amount, the type of business, etcDepends on the loan amount, the type of business, the value of fixed deposit8.50% + Risk Premium

Note – The risk premium will be dictated by the risk profile of an applicant.

Further, the bank announced that the interest rate on savings account balance of more than 1 lakh would also be set on the basis of the repo rate from the said date. The savings rate will be 2.75% below the repo rate. Taking this into consideration, the interest rate would be 3.50% per annum.

SBI Savings Account Interest Rates

Savings Account BalancePresent Interest RatesRates Likely from May 1, 2019
Savings Balance up to 1 Crore3.50%3.50%
Savings Balance above 1 Crore4.00%3.50%

Note – The proposed rates are indicated based on an assumption of RBI holding on to the repo rate in its monetary policy meet scheduled to take place in April 2019. If it changes the policy rate, the interest rate would change accordingly.

HDFC Bank Also Offers Interest Rates on Savings Based on Repo Rate

HDFC Bank has already been giving interest on savings account balances of 500 crores and above on the basis of the repo rate. The interest rate for the said balance reads as repo rate + 0.02%. Keeping in mind the current repo rate, the overall interest rate would be 6.27%.

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HDFC Savings Account Interest Rate from Jan 7, 2019

Savings Account BalanceInterest Rate
₹500 crores and above6.27% (Repo Rate + 0.02%)
₹50 lakhs and above but less than ₹500 crores4.00%
Below ₹50 lakhs3.50%

Note – The proposed rate on savings account balance is indicated on the basis of the current repo rate. If the RBI makes a change in the rate in its monetary policy meet scheduled to take place in April, the interest rate would change accordingly.

Impact of Repo Rate on Floating Rate Loans

Floating rates benchmarked to repo rate would be transparent. But there’s no clarity as to whether the interest rate will be at par, lower or higher with that of the MCLR. The spread, which is most likely to be fixed over the course of a loan, can be higher than the prevailing MCLR of banks. The repo rate is currently standing at 6.25%, falling by 25 basis points in its monetary policy meet held on Feb 7, 2019.  Since the RBI reviews the repo rate in every two months, the home loan, auto loan, loan against property rates can get reset in the same frequency in line with the policy rate changes at that time.  

What Should Borrowers Do?

Those who are planning to apply for a loan should first compare the lending rates offered by various lenders before applying. Also, the existing borrowers should also do a thorough research on the interest rates offered by lenders with respect to different floating loans so to save on the borrowing cost.  However, those who are having a good credit score can negotiate for a reduction in the spread to ensure the eventual rates are affordable for them to service the EMIs with ease.

Key Highlights of the Monetary Policy Review Meet Held on Feb 7, 2019

  • RBI cuts the repo rate by 25 basis points to 6.25%
  • The Monetary Policy Committee (MPC) decided to cut the policy rate under Liquidity Adjustment Facility (LAF) to 6.25% from 6.50%
  • The MPC voted in favour of rate cut in the ratio of 4:2. However, the committee was unanimous on change in stance from calibrated tightening to neutral.
  • The RBI governor estimated the headline inflation to remain below at its target or 4%. The inflation rate is estimated to range within 3.20%-3.40% and 3.90% in the first half of 2019-20 and the third quarter of the said financial year, respectively.
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Highlights of Monetary Policy Meet Held in December 2018

  • The committee proposed that the floating interest rates on personal, home, auto and micro and small enterprises (MSMEs) will be linked to external benchmarks like repo rate, from April 1 next year.
  • Currently, banks follow the internal benchmark system, including Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate and Marginal Cost of Funds based Lending Rate (MCLR).
  • However, as per RBI’s statement, the final guidelines to link the interest rate with external benchmark will be issued by the end of this month.
  • The committee sharply lowers its inflation projection to 2.7%-3.2% from 3.9%-4.5% for the second half of this financial year.

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Personal Loan Interest Rates May 2019
Bajaj Finserv10.99% - 16.00%
Fullerton India14.00% - 33.00%
HDFC Bank11.25% - 21.50%
ICICI Bank10.99% - 18.40%
IndusInd Bank10.99% - 16.00%
Kotak Bank10.99% - 20.99%
RBL13.00% - 18.00%
Standard Chartered Bank11.50% - 18.00%
Tata Capital10.99% - 18.00%
Home Loan Interest Rates May 2019
State Bank of India/SBI8.55% - 9.25%
HDFC8.65% - 9.65%
LIC Housing8.95% - 9.15%
PNB Housing Finance9.00% - 13.00%
Piramal Capital & Housing Finance9.00% - 9.10%
Tata Capital9.20% - 9.35%
ICICI Bank9.05% - 9.25%
Bank of Baroda8.70% - 9.70%
Axis Bank8.85% - 9.10%
Citibank9.00% - 9.85%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank8.90% - 8.75%
DHFL9.05% - 9.95%
Reliance Home Finance8.75% - 14.00%