Are You Getting the Full Benefit of RBI Rate Cuts?

RBI has reduced the repo rate from 4.4 percent to 4.0 per annum. If your home loan or any other loan is linked to the Repo rate, this is good news for you. RBI Repo rate has moved down sharply in the last 10-12 months.

Repo Rate ReductionDate
6.25% to 6%April 4, 2019
6% to 5.75%June 6, 2019
5.75% to 5.40%August 7, 2019
5.40% to 5.15%October 4, 2019
5.15% to 4.40%March 27, 2020
4.40% to 4%May 22, 2020

In September 2019, the Reserve Bank had asked the banks to compulsorily link fresh floating rate loan to external benchmarks from October 1, 2019. Even the borrowers on MCLR or base rate were to be given an option to switch to External benchmark linked loans.

If you took a repo rate linked loan in October 2019, your loan interest will be down (or soon be down) by 1.15% p.a. As a borrower, if your loan is not linked to the repo rate or any external benchmark, you need to see how much of the rate cuts by the Reserve Bank have been passed to you by your bank.

Other Permitted External Benchmarks Are down Too

By the way, it is not just the RBI Repo rate that has come down. The RBI also permits 3-month and 6-month treasury bill yields as the external benchmarks.

It is possible that your bank is using the treasury bill yields as the benchmark.  In the latest treasury bill auction by the Reserve Bank, the cut-off yield was 3.28% p.a. for 91-day (3-month) bill and 3.75% p.a. for the 182-day (6-month) bill.

To appreciate how much interest rate have come down, the 91-day treasury bill and 182-day bill auction happened at 5.4% and 5.5% respectively in September 2019. In May 2019, the 91-days and 182-days bill auction yields were 6.19% p.a. and 6.26% p.a. respectively.

You can also check the historical Treasury-bill rates on the Financial Benchmarks India Private Limited (FBIL) websiteYou can see there has been a very sharp reduction in the treasury yields too over the last 10-12 months. Hence, if your loan is benchmarked to 3-month or 6-month treasury bill yields, you would have benefited too.

How Much of the Rate Cuts Have Been Passed to You by Your Bank?

If your home loan is linked to the Repo rate or any external benchmark, the rate cuts will be passed on to you automatically. The external benchmark linked loan can have a maximum interest reset period of 3 months. Therefore, you will not have to wait for too long.

If your home loan is linked to base rate or MCLR, then your experience can be quite different. We know that the banks are not very keen to pass on the rate cuts to the borrowers.

A bank releases MCLR for various tenures. The banks typically use 6-month or 1-year MCLR for home loans. Here is the link to historical MCLR data for the State Bank of India. SBI uses 1-year MCLR for home loans.

 In September 2019, SBI 1-year MCLR was 8.15% p.a. Now, it is 7.25% p.a. A cut of 90 bps. In the same duration, the Repo rate is down by 140 bps (5.4% to 4%). You might argue that the SBI is yet to account for the latest repo rate cut on May 22nd. Fair enough. We shall see how much SBI MCLR goes down over the next one month. However, the total reduction in MCLR will still be less than the Repo rate.

What Should You Do?

If you are not an external benchmark, the odds are against you. It is unlikely that the banks will pass the rate cuts at the same rate at which the Reserve Bank is cutting rates.

If you are still on MCLR or base rate linked loan, approach your bank and try to understand the switching process. It is possible that the bank may charge you the fee for the switch. If the fee is reasonable, switch to the external benchmark.

It is possible that the bank may tinker around with the spread to keep the interest rate constant (I am not sure of this, but this is possible). In this case, if you think you are getting a raw deal, you can approach another bank to refinance the loan. One way to assess if you are getting a bad deal is to compare your loan interest rate with a new borrower with a similar credit profile.

I have discussed the decision process in detail in this post. Are you getting the full benefits of rate cut? If not, what do you plan to do?

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