Recent Posts

Sunday, June 28, 2020


What is REPO Based Lending Rate?

Repo Based Lending Rate (RBLR) or Repo Linked Lending Rate (RLLR) or External Benchmark Based Lending Rate (EBLR) is an new floating interest rate regime which is directly linked to Repo Rate.  It was mandated by RBI w.e.f. 01st October 2019. All the banks have shifted their Retail as well as MSME loan to this new regime and new loan are being sanctioned which carry interest rate directly linked to Repo rate.

How it works?

Repo Based Lending Rate is linked to the Repo rate. RBI reviews the Repo rate every month in its monthly review meeting and if needed the Repo rate is increased or decreased or kept unchanged. If your interest is linked to Repo rate then it is automatically changes with the change in Repo rate by RBI in its monthly review. It should not be confused that the Repo rate will always be in decreasing trend. It may increase also if the economic condition permits thereby increase your interest rate also.

For example if your Home Loan interest rate is linked to Repo rate and you are paying 7.00% interest rate. Present Repo rate is 4%. Then your interest rate is REPO+3% where 3% is the Bank margin over repo rate. This margin differs from bank to bank. Now if RBI decreases the repo rate to 3.00% then your home loan interest rate will automatically get reduced to Repo rate (3.00%)+3.00%= 6.00% . In other case if RBI increases the repo rate to 5.00% then your home loan interest rate will automatically increased to Repo rate (5.00%)+3.00%= 8.00%

What is MCLR?

MCLR stands for Marginal Cost of Fund based Lending Rate. In this regime interest rate depends on the Cost of Fund to Bank. MCLR was introduced by RBI with a view to link the interest rate of loans with the cost of fund to bank. Cost of fund depends upon the banks internal business as well as the repo rate. Initially it was assumed that Bank MCLR will be changed as per the change in repo rate and all the benefit or repo rate cut will be passed by the bank to customers. But These MCLR are typically have a reset period of 12 months i.e. your home loan interest will be reset every year on the loan anniversary date. Therefore technically benefit of all the repo rate cuts between these 12 months period was not being passed to the customers. Also if the overall cost of fund to bank has not reduced due to various factors then also MCLR will not be changed by the amount of change in repo rate

For example if you availed home loan on 01.01.2018 and your interest rate was MCLR+1.00% (here 1.00% is bank margin) and at that time MCLR of your Bank was 9.00% then your interest rate was 9.00+1.00= 10.00%. Now your rate will be fixed at 10.00% for one year and will be changed again on 01.01.2019. Now on 01.01.2019 MCLR is 7.00% then your interest rate will be 7.00+1.00=8.00%. Now if there was 5 repo rate cuts during 01.01.2018 to 01.01.2019 and bank MCLR reduced from 9.00% to 7.00%  but the benefit of the rate cut was not passed to you immediately.



MCLR as mentioned above is based on cost of fund to a bank and it is an internal benchmark whereas RBLR is Repo based and therefore the benchmark is external i.e. Repo Rate. In order to take the advantage of repo rate change RBLR is more beneficial for customer and customer can save a good amount of interest.

How to Shift to RBLR?

If you already have a running home loan and now after reading the benefits of RBLR, you want to switch your existing MCLR based loan to RBLR then here is the help:

  • Visit your bank and ask for the form to convert your interest rate from MCLR to RBLR
  • If there is no pre printed form then you can write a simple application. Mention your home loan account number, name, loan amount along with the request to switch to the RBLR
  • Then bank will generate you CIBIL and tell you the rate of interest you will get if you switch to RBLR
  • If new rate is OK for you then ask bank to proceed further with your application
  • There are charges to this switch over. SBI charges ₹5000/-+GST, BOI charge is ₹2500/-+GST. Deposit the charge as directed by bank
  • Now Bank will ask you to complete the documentation. Bank may require some stamp paper as per the stamp act of your state
  • After following the above steps bank will process your interest rate switch application. Every bank has its own TAT but it should be processed within 15 working days.

No comments:

Post a Comment