The State Bank of India (SBI), India’s largest lender, has made an important announcement that is expected to bring a paradigm shift in the way borrowers pay their EMIs on different loans, including home loans.
According to the SBI press release, the SBI bank has announced linking of its savings deposits rates and short-term loans to the RBI’s repo rate. The new rates, linked to the external benchmark rate, would be effective May 1, 2019. Currently, loans are linked to the bank’s cost of funds which is largely reflected through its internal benchmark Marginal Cost of Funds based Lending Rate (MCLR) declared by the bank every month.
Going forward, the MCLR regime will continue but by linking the savings deposits rates to the repo rate, the cost of funds will largely move in tandem with policy rates, thus ensuring better transmission. The banks get the flexibility to manage their Asset-Liability Management (ALM) better than before.
The concern was that whenever the RBI cuts the repo rate, the banks took time to pass on the benefit to the borrowers and there was always a time lag in lowering their lending rates. Going forward, faster transmission of rate cuts is expected. In a falling interest rate scenario, this will help borrowers in terms of lower EMIs while the reverse will happen when rates rise.
Who will not be impacted
Currently, SBI is offering an interest rate of 3.50 per cent for savings bank deposits up to Rs 1 crore and 4 per cent for deposits above Rs 1 crore. However, going forward, only deposits in savings account above Rs 1 lakh will be impacted and will henceforth carry a flexible interest rate. Savings account balance below Rs 1 lakh will continue to carry the fixed rate of interest of 3.5 per cent.
Small depositors with a balance less than Rs 1 lakh will not be hurt and they will continue to get a fixed rate of interest on the saving account balance. Also, borrowers with cash credit accounts and overdraft limits up to Rs 1 lakh will remain outside the linkage to the repo rate.
Now, if the repo rate is cut, the SBI bank will have to provide a lower interest to its saving account holders and thereby its own cost of funds will come down. With the cost of funds coming down, the MCLR and hence the lending rate too will come down. In such a scenario, the transmission is expected to be much faster than before. Earlier, the SBI bank was bound to give a higher a fixed rate on the saving account deposit irrespective of the fall in repo rate or had a time lag in doing so.
Home loan EMI is a function of mark-up and the reset date. Even though with the new rules in place, transmission becomes faster, it remains to be seen, how much impact it will have on home loan borrowers, especially the existing ones. In times of rising interest rates, the EMIs will shoot up equally fast.