India's biggest bank SBI or State Bank of India became the first bank to offer a home loan product where the interest rate was linked to RBI's lending rate, repo rate. This new home loan product was launched by SBI in July. Earlier, from May, SBI had linked large savings account (balance above 1 lakh) and all cash credit and overdraft accounts with limits above 1 lakh to the repo rate. After SBI, some other banks like Oriental Bank of Commerce (OBC) and Bank of Baroda have come up with new home products, linking them to RBI's repo rates. Recently, Reserve Bank of India chief Shaktikanta Das urged banks to link their loans and deposits pricing to the repo rate for better transmission of interest rates across the banking sector. More banks are likely to follow SBI in launching repo rate linked products.

How SBI's repo-linked home loan works

1) This new home loan product from SBI is linked to the bank's repo rate lending rate (RLLR), which in turn is linked to RBI's repo rate. RLLR is 225 bps over repo rate. As and when there is a change in RBI's repo rate, SBI's RLLR changes automatically and thus the home loan rate.

2) In case the RBI changes the repo rate, SBI's repo rate lending rate will change from the first day of the following month. For example, RBI cut repo rate by 35 bps earlier this month and accordingly SBI's RLLR will change from September 1.

3) SBI's repo rate lending rate was 8.00% as on 1 July 2019. From September 1, after the RBI's 35 bps cut on 6th August, SBI's RLLR will fall to 7.65%.

4) SBI then charges a spread, depending on the borrower's credit score (RLLR+40 bps or RLLR +55 bps) for home loans up to 75 lakh.

5) So, from September 1, for borrowers with good credit score, SBI will charge 8.05% (RLLR of 7.65% + 40 basis points) on this new scheme.

6) The spread fixed at the time of first disbursement in home loan will remain fixed for the entire tenor of the home loan, says SBI.

7) The spread increases to RLLR + 95 bps or RLLR +110 bps in case of home loans above 75 lakh.

8) SBI claims that currently it offers "cheapest home loan with interest rate of 8.05% as repo rate linked home loan and this rate will be applicable to all existing and new loan from 1st September."

9) For SBI customers, whose home loan rates are linked to the MCLR or Marginal Cost of fund based lending rate, the bank had reduced one-year MCLR to 8.25% per annum effective from 10 August, from 8.40% earlier.

If your SBI floating rate home loan is linked to MCLR, you will have a reset clause. It is typically linked to one-year MCLR and thus you will have a one-year reset clause. If the reset clause was in July and the MCLR cut happened in August, your home loan rate will not change till next July. MCLR is linked to the bank's actual deposit rate.

10) So basically, the transmission of change in RBI's repo rate is immediate in case of SBI's repo linked home loan while there is a lag in case of MCLR-linked loans.

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