Home loan borrowers are likely to benefit from the external benchmarking of interest rates. From 1 October 2019, banks will link the interest rate charged on consumer loans to the external benchmark rates. As a result, the interest costs may be lowered by a maximum of 0.3%. Consumer loans include home loans, vehicle loans, and so on.
Banks will benchmark the interest rates to the repo rate. Repo rate is the rate at which banks borrow from the Reserve Bank of India (RBI). The repo rate presently at 5.4% is the lowest since February 2010.
Banks are free to decide the spread above the repo rate. For example, SBI has marked the spread at 2.65% above the repo rate resulting in an external benchmark rate of 8.05%.
SBI states that this would lower the effective interest rate to 8.2% against 8.3% for the salaried home loan borrowers in the Rs 30 lakh category. Thus, the switch from the floating interest rate regime to the external repo rate would be beneficial to a borrower.
However, borrowers may incur additional charges based on their credit assessment and risk profiling. For example, the interest rate may be higher by 0.15% for non-salaried borrowers. Borrowers in the risk grade RG4 to RG6 may have to pay interest higher by 0.10%.
As per the RBI, the external benchmark rate can be the repo rate or the three-month or six-month treasury bill rate, or any other benchmark updated by the Financial Benchmarks India.
The RBI has earlier announced on September 4 that all would need to link consumer loans, loans to micro, small and medium enterprises (MSMEs) to external benchmark rates. The initiative of the RBI aims at reviving consumption, boosting credit growth and reviving investments in the economy.
A report from an independent credit rating agency suggests that external benchmarking of rates could result in significant fluctuations in the equated monthly instalments (EMIs) of borrowers. A rise or decline in the repo rate could lead to a corresponding increase or decrease in the EMIs.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.