The RBI has asked the banks to link floating loan rates of borrowers to an external benchmark from the 1st of October and also link their lending rates on floating rate loans to retail, personal and MSME borrowers to an external benchmark from the same date, as announced on the 4th September. The bank has put a hold on its existing repo linked home loan product as the country’s largest bank will try to comply with the directions of the RBI. SBI was the first bank to bring the repo linked home loan in June.
Many of the banks have already started linking the lending rates to the external benchmark and that includes the public sector lenders like SBI, UBI, Central bank of India and Punjab National Bank, along with private lender Federal Bank.
How will this new product measure up?
This new product will help remove inconsistencies between the existing product and what RBI is now recommending. So, from now on SBI borrowers will need a minimum annual income of INR 6 lakhs to be eligible for the repo- rate linked home loan and RBI has asked this facility to be made available to all.
The existing product will at have a clause that interest rates would be changing at the end of the month once the RBI changes the repo. This will undergo somewhat of a change as RBI has asked banks to ensure that the rates should be reset once in every three months. The bank will also allow all the existing home loan customers to switch to the new home loan product as on 30th September. SBI however, had long refrained from making a comment.
Important factors to note
It was reported that in case of repo rate linked home loans, the borrowers needed to repay a minimum 3% of their principal loan amount every year as EMIs. The maximum loan tenure of the earlier product was 33 years over and above the maximum moratorium that was permitted of two years in case of properties under construction. The total tenure could not exceed 35 years and a minimum of 20 basis points were charged by the banks above the applicable interest rate if the loan to value went above 80%.
The RBI had also allowed that the banks could choose between the RBI repo rate, the three month treasury bill yield by the government by Financial benchmarks India Pvt Ltd., the six month treasury bill yield of the government by the FBIL, or other benchmark market as published by the FBIL. The central bank has also put in place certain anchor rates and these benchmarks would be based on which lending rates are set, as bank loans prior to 1994 had interest rates set by a regulator.