On Tuesday, Allahabad Bank and Punjab National Bank informed of the launch of their retail loan products which will be linked to the Reserve Bank of India's repo rate as an external benchmark.
The public sector bank in a stock exchange filing informed that starting 1 September, home loans (up to Rs 75 lakh) and MUDRA loans will be linked to external benchmarks. It also said that customers will have the option to choose between MCLR or the external benchmark linked rates.
The filing said, "we wish to inform you that in order to ensure quicker transmission of policy rate adjustments, the Bank has decided to price its Housing Loans (upto Rs 75.00 Lakh and MUDRA Loans) sanctioned with effect from 01. 09.2019 with reference to the External Benchmark Linked Rates (EBLR). However, the borrowers shall have the option for either Marginal Cost of Funds Based Lending Rates (MCLR) linked loan or EBLR linked loan at mutually acceptable terms."
It further said that saving bank deposits of Rs 40 lakh and above will also be linked with an external benchmark, starting 1 October 2019.
"The Rate of Interest based on External Benchmark on aforesaid loans will comprise RBI Repo Rate, Average of last ten years Net Interest Margin of the Bank rounded off to the nearest 05 bps and Credit Risk Premium based on Internal Credit Risk Rating," it specified.
Punjab National Bank
From 27 August, PNB will be offering loans at 0.25 percent less interest than the existing rates on those based on MCLR, under its PNB Advantage scheme.
"The new rates will vary from 8.25% to 8.35% for housing loan borrowers and 8.65% for car loan borrowers," the bank said.
Further, it will also provide the option to its existing customers to switch to new RLLR (Repo-Linked Lending Rates) with minimal charges.
How will repo-rate linked loans help customers and the economy?
Repo rate is the rate at which the RBI lends to banks. This is set based on the condition of the economy. Earlier this month, the central bank made its fourth consecutive repo rate cut with an intent to make loans cheaper and push the economic activity in the country.
However, the rate cuts weren't transmitted to the same extent and at the same speed by the banks in their MCLR (the benchmark used by commercial banks to set interest rates on retail loans borrowed by its customers). This is because MCLR is based on many other factors besides the repo rate.
The escalating concerns of an economic slowdown in the last two months raised the urgency of passing on the benefits of the interest rate cuts to the people of the country. FM Nirmala Sitharaman said on 23 August that banks had agreed to link loans to the repo rate.
While these are beneficial to loan seekers in the current scenario where repo rates are low, it will also mean a faster increase in interest rates when the economy recovers.