Banks will adopt a system of linking housing loans to external benchmarks as per RBI directive this week. Experts said this would reduce the funding cost for borrowers by at least 30 basis points.
State Bank of India has set a spread of 2.65 percent above the repo rate. The repo rate is currently 5.40 percent. In this way, the external benchmark rate is being 8.05 percent. This will reduce the effective rate to 8.20 percent, which is 8.30 percent for salaried borrowers on home loans up to Rs 30 lakh under the Marginal Cost of Funds Based Lending Rate (MCLR) system.
Extra charge can be added
However, depending on the profile of the customer, some additional charges can be added on it. SBI will charge 15 basis points extra from non-salaried borrowers. Those with higher risk grades of 4-6 will additionally charge 10 basis points.
On September 4, the RBI said that banks would have to link retail customers and micro, small and medium enterprises loans to the external interest rate benchmark to better monitor the impact of monetary policy and boost credit growth, consumption and investment.
Banks have the freedom to set spreads above the external benchmark. In addition, the risk premium may change depending on the credit assessment of the borrower.
Equated Monthly Installations can also fluctuate
The repo rate at which banks borrow from RBI is the lowest since February 2010 at 5.4 per cent. The three-month treasury bill rate has fallen by 100 basis points since February to 5.28 percent. The six-month Treasury bill rate is now at 5.48 percent, instead of 6.4 percent in February. Between February 2019 and August 2019, the repo rate has been reduced by 100 basis points, while the MCLR has decreased by just 20 basis points.
A report by Icra said that external benchmarking of lending rates can cause considerable fluctuations in borrowers’ equated monthly installations. It estimates that the increase in the repo rate by 50 basis points could increase the monthly payment by Rs 2200 on a loan of Rs 75 lakh for 15 years. At the same time, an increase of 100 basis points can put a burden of Rs 4500 every month.