While the latest RBI move mandating banks to link floating loan rates to external benchmark will not bring about sharp lending rate cuts for borrowers. Here's detailed how and to what extent the move will do good to bank customer base:
So, what all should you factor in given the new lending norm:
Here in we wish to first specify that banks in deciding their lending rates take into account the cost of funds whether it be borrowing or lending. So, given the scenario where banks borrow just 1% of their deposits at RBI's repo rate it is unable to charge at the repo rate or even pass on the rate cut benefit to its customers.
Benchmark rate to be still different: Banks have been given options to choose the external benchmark from 6-month T-bill or 3-month T-bill, repo rate and others. So, even if the banks choose the same external benchmark, their benchmark rate can be different because of the initial rate. Herein we can quote the example of SBI and IDBI Bank, both of these banks have launched repo rate linked home loan option. Their RLLR or repo linked lending rate have been different, for SBI after the latest 35 bps rate cut, the RLLR is 7.65% while for IDBI Bank it is 8.3%.
Mark up also differs across banks: Basis the risk profile of the borrower, banks are allowed to charge some percentage amount over and above the benchmark rate. This extra rate charged is referred as spread or mark up value. In some of the cases it can even be nil for borrowers with high financial credibility or credit score above 750. So, with SBI's 40 bps mark up, effective loan rate comes to be 8.05%.
So, borrowers need to factor in both the initial rate as well as the mark up value which adds up to make the lending rate for him or her.
It is also notable that banks cannot change the mark up value unless there is a change in the borrower's credit assessment.
Quicker transmission of rates in case of RLLR or external benchmarking: So every time there is a change in RBI's repo rate, loan rates for consumers will change in a case when their loans are pegged to repo rate. The new rates come into force from the following month after the change is affected. So, the loan rates will be highly volatile and RBI has suggested banks to reset loan rates every 3 month.
EMI and principal repayment: For loans until now which were tied to MCLR or mraginal cost of fund based lending rate, there was a steady EMI and even after the reset term i.e. tied to the MCLR, banks usually changed the tenure for the borrower. But for the new external benchmark- pegged loans which are to be serviced on a monthly basis, there can be a variation in interest payable month on month. So, there is still no clarity on how the banks will carve out the re-payment structure for such loans.
For the SBI's RLLR home loan, a minimum of 3% principal is to be paid each year in equated monthly installments.
Should present loan borrowers switch to the new external benchmarking loan option?
The initiative has been doled out for new retail loans that offer floating rate such as home, auto and SME loan to link to the external benchmark from October 1. But current borrowers can still consider a switch in the same bank or may be other bank ( charges may be levied for the loan transfer) if that means substantial savings for you.
What the new external benchmarking rule means for banks?
It is said that till now the banks were not able to pass on the rate cuts to borrowers because the interest rate on deposits did not lower in the same quantum. Also, the banks worry on the front as their net interest margins will get impacted drastically.