State Bank of India (SBI) announced on Monday it will use repo rate as an external benchmark for all floating rate loans for MSME, retail and housing loans. Earlier, RBI had made it mandatory for banks to link all floating personal or retail loans to external benchmark. The new loan regime will come into effect from October 1, 2019, and will help in better transmission of policy rate which was not happening under the current marginal cost of funds based lending rates (MCLR) system.
We have decided to adopt repo rate as the external benchmark for all floating rate loans for MSME, housing and retail loans effective October 1, 2019, SBI said in a release.
In a notification dated September 4, RBI had asked the banks in India to disburse loans with interest rates linked to an external benchmark. These benchmarks were
- RBI Repo Rate
- Government of India 3-Months Treasury Bill yield
- Government of India 6-Months Treasury Bill yield
Earlier in July, SBI had introduced repo-linked home loan scheme which was later withdrawn. The fresh announcement came after SBI made few modifications to the scheme to meet the terms of the latest regulatory guidelines. From October 1, the SBI bank customers who avail loan under the new regime should now be ready for frequent changes in their loan rates. If there is a fall in interest rate, the new move will be benefit borrowers, but when interest rates rise, the borrowing rates or home loan rates will also go up at a faster rate.
The RBI has lowered the repo rate by 110 basis points so far this year. Apart from better transmission of policy rate, there will now be standardisation across the lenders and it will become easier for borrowers to compare interest rates not only at the point of a new loan but also over the lifecycle of the loan. Repo rate is the interest rate at which the central bank lends money to commercial banks.