Transmission of RBI rate cut is finally happening

Mumbai: The coordinated efforts of the government and the central bank to bring down lending rates for borrowers is finally bearing fruit. On Friday, State Bank of India (SBI) said it would launch repo rate-linked home loans from July 1. More lenders are likely to follow suit, as SBI is the market leader with around 35 per cent of share of home loans.

SBI's new product is in line with Reserve Bank of India's (RBI) direction to banks to link their lending rates to an external benchmark, such as the repo rate or G-Sec rate, to ensure faster monetary transmission. However, the RBI has put this direction on hold and would be releasing a circular on it soon.

The move, according to experts, addresses the decade-old grouse of home loan borrowers that banks are reluctant to pass on the rate cut benefits. In the new product, if the RBI cuts interest rates, the borrowers will get the benefit immediately. But the flip side is that if the RBI raises repo rates, lending rates will go up immediately.

Currently loans are linked to marginal cost of funds-based lending rate (MCLR). While the RBI has cut the repo rate by 50 basis points between February and May to spur economic growth, MCLR has come down by a mere 21 basis points for new borrowers, and has actually risen by 4 basis points for old borrowers. The RBI for the third time cut the repo rate this month by 25 basis points.

While the finer details of the product are awaited, the interest rate on a home loan linked to the repo rate will be 8.40 per cent.

Says PK Gupta, Managing Director, SBI: "The MCLR of a bank depends on a bank's cost of funds. SBI's one-year MCLR rate is at 8.45 per cent. Right now the best of SBI customers have their MCLR at 8.55 per cent, which is 10 basis points over the one-year MCLR. The repo rate linked home loan is at 8.40 per cent, which is 15 basis points cheaper than the MCLR-linked home loan rate. But the point is that this difference can shrink if the MCLR is revised downwards by SBI.”

"In a repo rate-linked home loan, the differential (with MCLR) can be higher, lower or even negative depending on the rate cycle," explained Gupta.

But experts differ. Says Vipul Patel, Managing Director and Ffounder, MortgageWorld, a mortgage advisory firm, "MCLR is derived by a formula where repo plays a pivotal role. So, effectively any change in repo will be captured in MCLR movement too. The difference between the two benchmark rates, being MCLR, will impact consumer on an annual basis while the repo rate home loan will impact consumer on immediate basis."

He added: "Over a period of time most banks will have just one benchmark, i.e external benchmark, repo is just one of the benchmarks and this move will usher in a new era of transparency in effective home loan pricing for the consumers. Banks will create some mechanism for consumer to move from one benchmark to other and from bank to bank."