RBI Directs Banks to Link the Loans to External Lending Benchmarks
Sep 14, 2019 Real Estate News
On September 4th, the RBI directed the banks and financial institutes to link their loan rates to the external lending benchmarks. The move is set to bring more transparency in the transmission of policy.
Banks will have to option to link the home loan either with the repo rate, the three or six-month Treasury yield or with any other benchmark published by the Financial Benchmark India Pvt Ltd. RBI has directed the banks to reset the loan liabilities at least once every three months after they make the switch. RBI has also given banks and financial institutes the liberty to decide the spread over the external benchmark.
State bank of India, Allahabad Bank, Bank of Maharashtra, Bank of India, Bank of Baroda, Union Bank, and Bank of India has already linked their loan rates to the repo rates.
According to the experts, the home loan borrowers must take advantage of it and link their loans to the repo rates. We discuss everything you must know before taking the step in that direction:
It is only available for floating rates: repo rate linked to the loan rates is only available to the loan borrowers who choose to pot for the floating rate of interest for their loans. The fixed home loan interest rates operate differently, and the whole repo rate changes barely affect it.
Banks will have to option to link the home loan either with the repo rate, the three or six-month Treasury yield or with any other benchmark published by the Financial Benchmark India Pvt Ltd. RBI has directed the banks to reset the loan liabilities at least once every three months after they make the switch. RBI has also given banks and financial institutes the liberty to decide the spread over the external benchmark.
State bank of India, Allahabad Bank, Bank of Maharashtra, Bank of India, Bank of Baroda, Union Bank, and Bank of India has already linked their loan rates to the repo rates.
According to the experts, the home loan borrowers must take advantage of it and link their loans to the repo rates. We discuss everything you must know before taking the step in that direction:
It is only available for floating rates: repo rate linked to the loan rates is only available to the loan borrowers who choose to pot for the floating rate of interest for their loans. The fixed home loan interest rates operate differently, and the whole repo rate changes barely affect it.
Affordability:
In repo rate does not mean that the home loan will get cheaper. The repo rate is the guiding factor that helps the banks to fix the interest rate. The final price is determined by factoring deposit rates and source of funds. This can be 300 to 400 points above the repo rates.The effect will be immediate:
Repo rate changes every two months, i.e., every time the repo rate changes, your interest rate changes too. Be mindful that if the repo rate increases, then your interest rate increases also.Keep track of RBI policies:
Taking the loan based on repo rates, the borrower needs to keep themselves updated on the RBI’s rate policies. If they think that their bank is not passing them the benefit of repo rate reductions, then they can think about moving to another bank.Know the calculations:
repo rates are the external benchmark; the borrower will have to be aware of the calculation his bank is using to determine the interest rate.Poor credit history may cost you more:
Experts are on the opinion that the banks might charge you 40- 50 bps more on the interest if your credit is poor.Risk involved:
You are one who likes to play it safe; then it is better to stick to MCLR system. The loans linked to repo rates are a risky business, and they can decrease and increase as the repo rate of the RBI changes.Looking for property portal?
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