State Bank of India (SBI) has put on hold its existing repo-linked home loan product and will launch a new one on 1 October, said a person familiar with the development, as the country’s largest lender by assets seeks to comply with the direction of the Reserve Bank of India (RBI).
SBI was the first to launch a repo-linked home loan in June. On 4 September, RBI asked banks to link rates on floating rate loans extended to retail, personal and micro, small and medium enterprises borrowers to an external benchmark from 1 October.
Several banks have already started linking lending rates to an external benchmark, including public sector lenders State Bank of India, Union Bank of India, Central Bank of India and Punjab National Bank, and private lender Federal Bank.
According to the person, the new product will remove inconsistencies between the existing one and what RBI has said in its circular. For instance, while to become eligible for the repo rate-linked home loan from SBI, borrowers needed a minimum annual income of ₹6 lakh, RBI has asked banks to make it available to all.
“Moreover, the existing product had a clause where interest rates would change at the month-end of RBI changing its repo rate. This needs to be tweaked as RBI has now asked banks to ensure rates are reset once every three months," he said. The bank, he said, will allow all existing home loan customers as on 30 September to switch to the new product.
SBI did not respond to an email till the time of going to press.
Mint reported on 16 June that in case of repo rate-linked home loans, borrowers need to repay a minimum 3% of their principal loan amount every year in equated monthly instalments. The maximum loan tenor of the earlier product was 33 years over and above maximum moratorium permitted of two years for under-construction properties. The total loan tenor can’t exceed 35 years and the bank charged a premium of 20 basis points above applicable interest rate if loan-to-value was above 80%.
RBI has allowed banks to choose between RBI’s repo rate, government’s three-month treasury bill yield published by Financial Benchmarks India Pvt. Ltd (FBIL), government’s six-month treasury bill yield published by FBIL or other benchmark market rate published by FBIL.
RBI has mandated various anchor rates—benchmarks based on which lending rates are set—for bank loans since 1994, before which interest rates used to be set by the regulator.