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Home Articles Repo Linked Loans from Oct 1: Know how it Benefits You!

Repo Linked Loans from Oct 1: Know how it Benefits You!

IndianMoney.com Research Team | Posted On Monday, September 30,2019, 05:50 PM

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Repo Linked Loans from Oct 1: Know how it Benefits You!

 

 

Repo Linked Loans from Oct 1 – Know how it Benefits You!

The Reserve Bank of India (RBI) has directed the banks to link their interest rates to its benchmark repo rate by October 1. Even though the RBI has cut the repo rate, banks are yet to transfer the benefits to customers. In the backdrop of this, banks have been issued a circular to issue repo based loans to customers.

This move from the RBI could result in lower interest rates on newly availed housing, auto or personal loans. Here's what consumers can expect from repo interest rate loans.

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What is repo rate?

Repo rate or repurchase agreement is the rate at which RBI lends money to the commercial banks in India. In other words, it’s an instrument of RBI’s monetary policy through which banks can borrow funds.

What’s repo-based lending?

Repo-based lending is a way in which banks set interest rates on loans offered to their customers in accordance with RBI's repo rate.

See Also: How to Switch to Repo-Linked Home Loan?

Why does RBI suggest a repo rate loan?

This year, the RBI has cut the base rate by a total of 110 basis points, but this has not benefited consumers. The RBI has dropped 25 elements on February 7, 25 on April 4, 25 on June 6, and 35 on August 8. Accordingly, this year, the total number of elements dropped by 110, and the repo rate fell to a 9-year low. However, only 29 per cent of the dividends are transferred to customers on average. For this reason, RBI has directed that repo based loans be issued.

Repo takes over MCLR: Banks are authorized to set interest rates on loans, based on how much it costs to set up deposits in banks. This is known as the Marginal Cost of Fund Based Lending Rate (MCLR). MCLR is also scheduled on a repo basis. But there was no paradox in MCLR. MCLR varies from bank to bank.

The Reserve Bank of India has made it clear that banks should charge interest on loans from October 1. Banks should follow the benchmarks of the Government of India’s 3 or 6 months Treasury bill yields or the interest rate published by Financial India Benchmarks India Private Limited (FBIL).

Repo-Rate Cut: Is it a benefit or loss?

Consider this example. A person takes a loan for a 10-year period, at the current repo rate of 5.4%. Accordingly, the interest rate of the loan will be 8.05% and the monthly EMI will be Rs. 60,796 payable. After three months, if the Reserve Bank of India hikes the repo rate from 5.4 per cent to 5.65 per cent, the EMI too will increase to Rs. 61,445.

POSSIBILITY OF RISE IN EMI DUE TO REPO RATE HIKE

Loan Amount

Loan Term

RBI repo rate at the time of borrowing

Monthly Installment when availed (EMI)

Revised RBI Repo rate after three months

Increase in monthly installment (EMI) after three months

Rs. 50 lakhs

10 years

5.4%

Rs. 60,796

5.65% (increased)

Rs. 61,445

 

         

 

A POSSIBLE REDUCTION IN EMI DUE TO A REPO RATE CUT

Loan Amount

Loan Term

RBI repo rate at the time of borrowing

Monthly Installment when availed (EMI)

Revised RBI Repo rate after three months

Increase in monthly installment (EMI) after three months

Rs. 50 lakhs

10 years

5.4%

Rs. 60,796

 5.15 (decrease)

Rs. 60,151

Things to know about repo rate:

1. The RBI has suggested that the interest rate of the loans offered at repo rate be revised at least every three months.

2. There are some limitations to those who have already borrowed under the Marginal Cost of Fund Based Lending Rate (MCLR). The bank has to pay management fees to transfer the loan already received to the repo.

3. Transferring an existing loan to a repo is not much of an advantage if the loan amount and duration are low.

4. If the RBI continues to cut interest rates, the interest on repo-based loans will fall. On the other hand if it increases the interest rate too will go up.

5. Banks have the option to increase interest rates when lending on a repo basis, even if the customer's credit history is not up to the mark.

6. The higher the bank's base rate, the higher the interest rate. The customer should be careful with the choice of bank here.

7.  Banks have a big challenge in implementing the repo rate. Its success depends on how consumers adapt to repo rate fluctuations and how banks compensate for it.

See Also: Your Home Loan Rate Will Go Down

Timeline of changes in interest rate calculation

Changes in interest rate setting

Year

Changes

1994

Prime Lending Rate (PLR)

2003

Benchmark Prime Lending Rate (BPLR)

2010

Base Rate

2016

Marginal Cost of Fund Based Lending Rate (MCLR)

2019

Repo Linked Lending Rate (RLLR)

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