Home loan interest rate benchmarks have kept on changing over the last decade. We used to have the Prime Lending Rate (PLR), which was replaced by Base Rate. The base rate, in turn, was replaced by the Marginal Cost of Funds based lending rate (MCLR) a couple of years back. Now, SBI is launching a home loan product where the benchmark is linked to the Repo rate.
Internal Benchmark Vs. External Benchmark
Home Loans are offered at a spread over a benchmark (Benchmark + Spread). Typically, the interest rate benchmarks are internal. This means the benchmark rate is, through a formula, linked to the cost of funds for the banks. Under the base rate regime, it was the overall cost of funds. Under the MCLR regime, it is the cost of incremental funds for the banks.
The loan spread is decided based on the quantum of loan, creditworthiness, your profession/employment status and other factors that affect your repayment ability.
With retail borrowers, a common grievance is that banks are quick to pass on interest rate hikes but are not very prompt in passing the interest rate cuts to borrowers.
By the way, retail investors are not the only ones who have issues with internal benchmarks. The Reserve Bank has its issues too. Its monetary policy transmission gets impeded. For instance, the RBI may want to boost the economy by lowering interest rates. However, if the banks do not (or cannot) cut interest rates for any reason, the repo rate cut will have no impact. Alternatively, the cut in loan interest rates may be much lesser than the policy rate cuts by the RBI. Hence, moves to linking loan interest rates to external benchmarks have been thought of. With external benchmarks, the banks cannot give any excuses. They must pass on the rate cuts/hikes in line with the change in the external benchmark.
The Reserve Bank, in late 2018, had mandated that the banks link all floating rate loans offered after April 1, 2019 to an external benchmark. Do note that the Reserve Bank has since put this direction on hold. The banks were given options for the external benchmark.
- Reserve Bank of India policy repo rate, or
- Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
- Government of India 182 days Treasury Bill yield produced by the FBIL, or
- Any other benchmark market interest rate produced by the FBIL.
As you can see, the Reserve Bank had not asked banks to move only to a benchmark that is linked to Repo rate. Repo rate is only one of the options. Citibank had come out with a similar home loan product in early 2018 (much before RBI guidelines). Citibank had linked the loan interest rate to 3-month Treasury bill rate. Now, when SBI comes up with a new home loan product, people notice. It is no different this time.
SBI Repo Rate Linked Home Loan
From July 1, 2019, SBI shall provide an option to home loan borrowers to apply for loans with Repo rate linked lending rate (RLLR) as its benchmark.
Repo rate linked lending rate (RLLR) is 2.25% over the Repo rate. Repo rate is the interest rate at which the Reserve Banks lends to the banks. The Repo rate is one of the monetary policy instruments used by the Reserve Bank. Currently, the repo rate is 5.75% p.a. RLLR becomes 8% p.a. An interest rate spread will be charged over RLLR.
You will be offered home loan at: Repo Rate + 2.25% + Spread
As I understand, RLLR is a nomenclature used by SBI to define this benchmark. Moreover, the spread of 2.25% over Repo Rate is also SBI’s choice. Other banks that link to Repo may choose a spread different than 2.25%.
SBI Repo rate Linked Home Loan (RLLR): Points to Note
- The product is going to be launched from July 1, 2019. There is not much information on the website. Therefore, I do not yet have complete information about the loan product.
- You must have a minimum annual income of Rs 6 lacs.
- The maximum loan tenure can be 35 years (quite long).
- Additionally, the repayment structure is different from regular home loan products. Under regular home loan products, very little principal gets repaid initially. However, with the RLLR linked loan product, at least 3% principal must be repaid every year. Therefore, you can expect EMI (or loan installments) under this loan product to be higher. Quite possible the repayment structure is like Axis QuikPay. With a higher EMI initially, your home loan eligibility may go down (as compared to regular home loan).
- I do not completely understand why there is an insistence on repayment of 3% principal every year (not that it is a bad thing). Perhaps, SBI wants to control interest rate risk. After all, RLLR is an external benchmark.
- We do not yet know what the reset period for RLLR loan is going to be. With SBI, home loans are linked to 1-year MCLR. In such a case, the reset period is 1 year and your home loan interest rate changes only at 1-year intervals. Therefore, even though the MCLR (the benchmark) may change in the interim, the prevailing MCLR will be applicable to your loan only 1 year after the previous interest rate reset.
Read: Axis QuikPay Home Loan: A Home Loan without EMIs
MCLR vs RLLR: Which is better?
The home loan borrowers will have both the options starting July 1, 2019. When MCLR was introduced to replace base rate, all the new loans were linked to MCLR. Therefore, there was no option for borrowers. Existing borrowers who had their loans linked to the base rate were given an option to shift to MCLR with or without paying the fee.
Read: Should you switch from Base Rate to MCLR?
Read: Do not ignore Spread while switch from Base Rate to MCLR?
Between RLLR and MCLR, the new borrowers have a choice. They can go with either option. Existing MCLR borrowers may get an option to switch to RLLR later with or without paying the switch fee.
I am inclined to believe that your loan interest rate (at the beginning) will be the same. The bank will adjust the spread accordingly. So, don’t expect quick gains because of this new variant.
On the benefits front, if your loan is linked to an external benchmark (like Repo), you will no longer hold a grievance that your bank is not passing on the interest rate cut to you. The bank has no control over the repo rate. With MCLR, you do not know the underlying calculations. With RLLR, you know the repo rate and the spread and can calculate your loan interest rate easily.
At the same time, repo rate can be changed by RBI at any point in time, although the announcements are typically made after bi-monthly meetings (8 weeks). Do note I still do not know what the reset period for RLLR linked home loans be. If the reset period is 3 months or 6 months, your loan interest rate and the EMI can change more frequently. As a borrower, this can be a good thing when the rates are moving down but can discomforting when the interest rates are moving up. For instance, Citibank home loan product mentioned earlier has reset period of 3 months. Currently, SBI has 1-year reset period for MCLR linked loans i.e. your loan interest rate changes only after 1 year.
Between MCLR and RLLR, the choice is not very crisp, at least now. If you don’t trust banks, RLLR is clearly a better choice. The rest can wait and find out more details about the product before they make a choice.
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16 thoughts on “PLR, Base Rate, MCLR and now RLLR (Repo rate linked lending rate)”
Deepesh,
The saddest part of this RRLR introduction is that now the bank will leave MCLR the same or will only increase it just like they did with Base Rate when MCLR first came. So those with MCLR will be stuck with whatever rates they have. We know RBI is all talk and no action especially with the bureaucrat sitting as governor.,
Every few years they change these things only to understand that nothing changes on the ground or it gets worse.
With RRLR, SBI has chosen a very opportune time to introduce it because Repo rate is the lowest for 10 years and have not much room to go down further. So now they fix it with a markup of 2.25% + spread of 0.4 to 0.55% and from here every repo rate increase by 0.25% will mean the rates will go up by same.
Remember 6 months back repo rate was 6.5%, if we get there again, people will be paying more than 9.15% with RRLR, But MCLR based system 6 months back had it only at 8.8%-8.9%
The difference and the dangers are clearly visible.
Everybody is playing this game nicely.
Hi Pradeep,
Right. That borrowers can corner banks because of some policy change is wishful thinking.
I agree 2.25% is quite important.
Got to see what the product is. Can’t comment about spreads that the banks charge.
However, one thing is for sure. RLLR is transparent. Whether that translates to benefits for the customer remains to be seen.
But won’t any change in RRLR affect both the new and old borrowers equally?
It’s going to be just the spread that will differentiate between them. Just a matter of max 40 to 55 bps, which can be covered in 1 conversion in the near future.
Hi Abhijeet,
Not sure if I got your query right.
Yes, change in RLLR would affect new and old borrowers equally. The only difference will be due to the reset period.
Apart from that, the spread will be the only difference.
The issue that Pradeep raised was about 2.25% of markup over repo to determine RLLR.
Hi Deepesh,
Much of the details are out. The RLLR will change for existing and new borrowers as soon as Repo Rate changes which can happen every 2 months.
And the spread is 0.4% to 0.55%. So to start with it will be 8.4 to 8.55% when the repo rate is 5.75%.
When the repo rate was 6.5% in Jan 2019, MCLR was 8.55%.and add a 0.25% spread, customers were paying about 8.8% at lower end.
This means 0.75% repo rate cut from last 5 months has translated to 0.4% cut for borrowers in the new system. Even worse, MCLR has only fallen to 8.45% about 0.1%.
And believe me, the 2.25% markup is not set in stone. They will increase it if repo rate goes down further. This will affect new customers. They can play with spread too. There is no regulation from RBI to set this markup to a std value forever.
Other banks will happily follow SBI, there is nothing called competition in India. Banks gang up to loot its customers easily.
Hi Pradeep,
Repo can change every 2 months (or even more frequently). RLLR will also change. However, as I understand, there must be some reset period (just like we have in MCLR)
Can you please point me to the source where it is mentioned that the RLLR has no concept of reset period? I have not been able to figure this out yet.
Hi Deepesh,
Here is an interview by SBI MD. He has mentioned that any change in Repo rate will be directly passed on to the borrower. No mention of any reset period and thats understandable.
https://www.dnaindia.com/business/interview-sbi-customers-can-avail-both-mclr-repo-rate-linked-home-loans-p-k-gupta-2762085
He has also mentioned that EMI structure will be different here with a minimum3% principal has to be repaid and interest will vary based on repo rate.
Thanks Pradeep for sharing.
I would still wait and check the final wordings.
Was aware of the 3% minimum repayment every year.
Hello Raghav,
When I was borrowing a home loan 3 years back, I had extensively read your articles (now subscribed) and raised quiet a queries to you to ascertain between – Base rate and MCLR. Your wisdom helped me back then to choose MCLR as the preferred benchmark rate and it indeed was a wise decision. Let me thank you for that. Now I am again at that juncture of my life where I am going for another Home Loan and now I have RRLR vs MCLR fight.
My requirement : 1 Cr.
My Liability : 30 Lac existing Axis Bank Home Loan at 8.65 + 0 spread
My Options : 1) Axis Bank – 8.65 + 0 spread, Rs. 5000 processing fees. 2) Kotak Bank – 8.70 + 5 bps. No processing fees. 3) SBI Maxgain – Not got the quote yet, but I am considering this option since I shall have Rs. 20 lacs that I can park with the OD account. 4) SBI – To wait for RRLR.
Per my thinking a ‘zero spread’ weigh over everything else. I am right to think that? Can you help with the decision yet again pls?
Hi Deepesh – Waiting for your reply in anticipation. Thank You.
Thanks Prasad for the kind words!!!
There is not enough information.
In any case, I don’t see any reason for the switch now. The new deal has to be significantly better for the operational effort required.
Hi Deepesh ,
All of the details related to SBI RRLR are out now . I’m looking for 70 lakh loan . Should i go with max gain linked with MCLR at 8.75 or With 8.05 with RRLR ? Repo rate is at 5.40 . Downside is very limited now i.e may be around 40 paise. However upside is huge . Last 15 years data says Repo can go up to 9 . So whats your suggestion – should i look for a short term gain of 0.70 now or stick with max gain product considering product related benefits and repo cycle directional change towards upside in an year from now ?
Please advise as i have take decision in a day or two . Thanks in advance .
Hi Deepesh,
I am am applying for SBI home loan.
I am getting 8.75 ROI in max gain and also Getting PMAY.
Today I asked bank officer to apply for RRLR based loan. He said you will not get PMAY in case of RRLR based home loan
Could you please clear my Doubt please? Do I am eligible for PMAY if I opt RRLR based loan.
Thank you in advance for your help.
Hi Deepesh,
Since the banks are now obligated to benchmark their loans (Home Loan in particular) against an external rate. I understand from your articles the option other than a Repo rate is the Treasury Bill yield. I wanted to understand which rate would you weigh better in the following given scenario. Considering the application fees are minimal – Rs.5,000.
1) Repo Rate + Spread= 4% + 3.30% = 7.30%
2) 3M Treasury Build Yield + Bank Rate + Spread = 3.28% + 3.21 + 0.59 = 6.99%
Appreciate your response pls.
Sir,
I have taken home loan in Sep’2014 at floating interest rate. i.e. if the interest rate increases my loan tenure will increase and interest rate comes down, emi will remain same but tenure will comes down. This was the agreement made between me and the bank.
In between the years i have received letters and messages, mails from the bank saying that the interest rates are gone up and your loan tenure is extended further for 3months and 6months etc., similarly i have received some messages, letters for reduction in interest rates and tenure is reduced to the months.
Till Jan’2019 i have not verified with bank for my outstanding and visited the bank and asked them what is the outstanding. they said it is a 10yr tenure and 5yrs are completed, if you convert to present rate it will be another 4yrs you can close with same emi. and to convert there is a fee involved they said.
I have asked them why should i convert it was already mentioned in the loan agreement that once interest rates comes down, automatically the tenure will be reduced and why should i pay the processing fee now. they said that it is a process. I kept quiet and not paid any fee for conversion etc.,
After two year i.e. in Jan’21 again visited bank and enquired about loan outstanding, they said that again if i covert it will be 48months to close the loan by paying processing fee.
I surprised to note that two years back they said another 4yrs to pay and now also they said 4yrs to pay if i convert.
My question is that whether is have to pay and get conversion of interest rates as advised by the bank every one or two years.
What is the sanctity of the loan agreement made which tells about increase of tenure when interest rates increase and reduction of tenure when interest rates are low. will it not automatically calculate and published by the bank.
They promptly sent letters when interest rates gone up and tenure increased in between, but they do not have courtesy to reduce the interest rates as per RBI guidelines and intimate to the lender.
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