SBI to benchmark floating rate loans on repo rate from 1 October
23 September 2019
State Bank of India will use RBI’s repo rate as the external benchmark for all floating rate loans for medium, small and macro enterprises, housing and retail loans beginning 1 October.
In a notification issued to lenders, including commercial banks and non-banking finance companies on 4 September, the Reserve Bank of India had made it mandatory for banks to link retail loans like housing and automobile loans to an external benchmark.
RBI in its circular said the banks are free to choose from among several indicated benchmarks, which included RBI's repo rate, the yield on 3-month Government of India Treasury Bill published by the Financial Benchmarks India Private Ltd (FBIL), the yield on 6-month Government of India Treasury Bill published by the FBIL or any other benchmark interest rate published by the FBIL.
SBI said it has voluntarily decided to extend the external benchmark based lending to medium enterprises also, to boost lending to the MSME sector as a whole.
The repo rate is the rate at which RBI lends money to banks.
The central bank’s has been forced to impose the repo rates on banks after it observed that the transmission of repo rate changes by banks under the current regulatory framework is muted.
SBI currently offers home and auto loans at an interest rate of over 8 per cent. The rates could come down after the bank links the rates to RBI set repo rate.
The central bank reduced its policy rate to 5.40 per cent on 7 August, and by a total of 110 basis points this year.
SBI, which introduced floating rate home loans from 1 July 2019, has effected some modifications in the scheme effective 1 October 2019 to comply with the latest regulatory guidelines.
RBI has given banks the freedom to decide on the spread over the external benchmark. However, credit risk premium can change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.
Further, other components of spread, including operating cost, could be changed once in three years.
Existing loans and credit limits linked to the MCLR/Base Rate/BPLR shall continue till repayment or renewal, as the case may be.
The RBI also said that existing floating rate term loans sanctioned to borrowers who are eligible to prepay a floating rate loan without pre-payment charges will be eligible for switch to external benchmark without any charges/fees, except reasonable administrative/legal costs. And the final rate charged to this category of borrowers, post switchover to external benchmark, shall be same as the rate charged for a new loan of the same category, type, tenor and amount, at the time of origination of the loan.