Interest rates: Repo-linked loans likely to be cheaper by 40 bps

Updated: August 22, 2019 7:07:16 AM

Taking the lead in doing this are the public-sector banks, which have introduced these products from August. While State Bank of India was the first to announce such a product in July, Bank of Baroda also announced its own decision to launch such products this month.

Better transmission, Repo rate, loan, loan rate, SBI, MCLR, Ficci, BoB, Oriental Bank of Commerce, Syndicate Bank, economy newsAll things remaining unchanged, if one were to go for a floating rate term loan where the interest rate is linked to the repo rate, the interest rate is calculated at repo rate+2.95%

By Mitali Salian

Banks now have on offer a lot more transparent auto and home loan products that are linked to the repo rate. Floating rate retail loan products linked to the central bank’s benchmark rate are at least 10-35 basis points cheaper compared to the regular marginal cost of funds-based lending rate (MCLR)-linked products, which should effectively put an end to agonising debates over effective transmission of the Reserve Bank of India’s rate actions to a borrower’s equated monthly instalments.

Taking the lead in doing this are the public-sector banks, which have introduced these products from August. While State Bank of India was the first to announce such a product in July, Bank of Baroda also announced its own decision to launch such products this month.
The catch, however, is that the repo rate-linked interest rates would be more volatile, compared to existing MCLR-linked products, since effective rates would be applicable in the following month after the RBI tweaks its rates whereas across existing products, the reset clause banks offer are between six months to a year or once a quarter. More importantly, repo-linked loans are at their best in a downward rate cycle.

So far, PSBs such as SBI, BoB, Oriental Bank of Commerce and Syndicate Bank have launched or announced details for retail loan products linked to an external benchmark. Other state-run peers are expected to follow suit in coming days, including the likes of Union Bank of India, Central Bank of India and Allahabad Bank.

Earlier this week, RBI governor Shaktikanta Das said the time has come to formalise linking of new loans to external benchmarks at the annual banking conference organised by the industry lobby Ficci. “We are monitoring this and will be initiating necessary steps,” Das said.
In case of SBI, the first to launch the above-mentioned product, the effective benefit to a customer opting for a repo-linked product against an MCLR-linked one is around 25-35 bps. SBI’s one-year MCLR is at 8.25% as of August 10.

A MCLR-linked term loan of Rs 30 lakhs to Rs 75 lakhs for a salaried customer of SBI would mean an effective interest rate of 8.65%, or 8.75% for a floating rate product. Meanwhile, if the same customer opts for a home loan with interest rate linked to repo rate, the effective interest rate would be calculated as repo-linked lending rate (repo rate + 2.25%) + additional 40 bps.

Considering SBI’s RLLR stood at 8% as of July 7 (RBI repo rate of 5.75% then + 2.25%), the effective interest rate would be 8.40%. The central bank’s latest 35 bps rate cut would mean that on September 1, the effective interest rate on SBI’s repo rate-linked home loan would be 8.05% (repo rate of 5.40%+225 bps+40 bps).

The above calculations have been made setting aside any additional processing costs that the customer is expected to pay, along with the risk premium the bank chooses to apply, which in the above case would be same for the customer in both instances.

In case of BoB, currently, the one-year MCLR stands at 8.45%. While the bank offers the best rate of one-year MCLR to customers who are best rated on credit bureau (Cibil), the interest rate ranges between 8.45%+ up to 1% additional interest as per the customer’s risk rating (linked to Cibil) along with a risk premium of 0.05%, which could be waived off as incentive to the borrower who provides credit insurance cover for the loan for entire tenure of the loan.

All things remaining unchanged, if one were to go for a floating rate term loan where the interest rate is linked to the repo rate, the interest rate is calculated at repo rate+2.95%. With RBI’s repo rate at 5.40%, the effective interest rate applicable would be 5.40%+2.95%+additional interest as per the customer’s risk rating.

The benefit in comparison to the customer today would be around 10 bps. According to BoB, the other benefit would be that as long as one is in a declining interest rate cycle, any benefit from MPC rate cuts get transferred to the customer without the customer having to wait for a change in the MCLR of the bank. So that, even if the spread the bank charges over and above the repo rate remain unchanged through the repayment period, any actual change to the repo rate reflects in the EMI payable with immediate effect.

Syndicate Bank has also decided to introduce repo-linked deposit rate and repo-linked lending rate on Housing, vehicle and consumer loans will now be offered at a repo linked rates basis. Housing loans will start from repo rate +2.90%, giving a current effective rate of 8.30%. Meanwhile, the bank’s one-year MCLR alone meanwhile stands at 8.35% as of August 12.

Meanwhile, Oriental Bank of Commerce also announced new variants of home and vehicle loans available at repo rate-linked interest rate on Tuesday starting at 8.35% and 8.70%, respectively, “thus passing on further benefit of 20 basis points and 25 basis points, respectively, to the current MCLR-rated pricing”.

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