Banks have started rolling out benchmark-linked lending rates as per the Reserve Bank of India (RBI) mandate. RBI had decided in favour of external benchmark linked lending rates over the existing marginal cost of funds-based lending rate (MCLR) system because according to the regulator, the transmission of policy rate changes to the lending rate of banks under the MCLR framework wasn't satisfactory.
The regulator issued a circular on 4 September mandating that banks link all new floating rate loans to an external benchmark like repo rate, 3-month or 6-month treasury bill yield, or any other benchmark published by the Financial Benchmarks India Pvt. Ltd., from 1 October 2019. Most banks have chosen to link their rates with RBI repo rate, and even before RBI had made it mandatory, several banks, including State Bank of India, Bank of Baroda and Oriental Bank of Commerce had launched repo-linked lending rate products. This was done in an effort to ensure faster transmission of policy rate cuts to borrowers.
While most banks have chosen to link their rates to the repo rate which is currently at 5.4%, many haven’t put out their detailed rate structure. The exact numbers are still up in the air as banks wait for RBI's monetary policy review due on 4 October, in which the RBI is expected to cut rates by another 25 basis points, which would bring down the lending rates further. RBI has cut the repo rate by 110 basis points from 6.5% to 5.4% since January. “A lot of the banks have still not come out with their final rates and frameworks. My sense is that with the monetary policy review coming up, they want to wait till things settle to make the final announcements. Chances are that the final rates will be announced on the day of the monetary policy review or the day after, " said Gaurav Gupta, CEO, MyLoanCare.
The banks are free to set and charge a “spread" over and above the RBI repo rate, which would make their effective interest rates significantly higher than the benchmark. While HDFC Bank has not announced repo-linked lending rates, ICICI Bank has stated that it will charge a spread of 350-380 bps for home loans of up to ₹35 lakh issued to salaried customers. This would bring the bank’s effective interest rate to 8.9-9.2%. State Bank of India, which was the first to launch a repo-rate linked home loan product in July has revised the rates. “SBI has relaunched their repo-linked home loan at a slightly higher interest rate (by increasing the spread). They are currently pricing it at 8.20% for loans of up to ₹30 lakh, instead of 8.05% announced before," said Gupta.
If you are in the market for a home loan, it would be a wise idea to wait out the next few days to see where the rates settle. According to Gupta,, on the 1st of any given month there is usually a lull in terms of retail lending. October 2 being a holiday would mean that this lull would get extended by a day. “Whatever bookings have happened till 30 September are done. Fresh disbursal in the month of October would not happen before the 3rd or 4th, by which time the monetary policy review would also have happened, so banks can take a call then," he said.