Why Did SBI Introduce New Benchmark EBR in Place of RLLR?

SBISBI had introduced home loans linked to RBI Repo rates as the benchmark in July 2019. This was before the RBI mandated all fresh floating rate loans to retail borrowers from October 1, 2019 to be linked to an external benchmark. SBI had used Repo rate linked lending rate (RLLR) as the benchmark. RLLR was set at Repo Rate + 2.25% p.a. This spread of 2.25% is completely internal to the State Bank of India.

In a sudden turn of events, SBI withdrew RLLR linked home loan product, barely 3 months after the product was introduced.

What Could Be the Reasons for Withdrawing RLLR?

RLLR linked home loans had stringent eligibility criteria.  Among others, you must have a minimum annual income of Rs 6 lacs. SBI was offering both MCLR and RLLR linked loans since July. Further, the State Bank had discretion whether to allow existing borrowers on MCLR or base rate to shift to the RLLR linked loan.

RBI circular date September 4, 2019 changed many equations.

Firstly, all the new floating rate loans (includes home loans) must be linked to an external benchmark. MCLR is clearly gone for the new loans. This option isn’t available for SBI from October 1st.

Secondly, the bank can use only one benchmark for a category of loans. It must be RLLR or some new freshly constructed benchmark for the home loan.

Thirdly, as per the RBI circular dated September 4, 2019, the existing borrowers whose loans are linked to MCLR or Base rate must be allowed to shift to the external benchmark for a reasonable fee.  So, SBI can’t stop existing borrowers from shifting to external benchmark. Not just that, if I understood it right, the spread over the external benchmark rate (RLLR or any new one) to be used while shifting must be same as the new borrower with the same credit profile would get. When MCLR was introduced, existing base rate borrowers could shift to MCLR but the spread over the MCLR was adjusted to keep the pre-shift or post-shift interest rate same (unless the borrower paid a fee). As I understand, the SBI won’t be able to tinker around with the spread this time around. The bank can’t charge a different spread (as compared to a new borrower with the same credit profile). Therefore, RLLR (or the new benchmark) must price in such possibilities too.

Finally, SBI could have foreseen margin pressure because the Reserve Bank changed Repo rates yet again in October monetary policy meet.

Perhaps, SBI worked out that the RLLR or (Repo Rate +2.25% p.a.) was not enough. Hence, RLLR home loan product was withdrawn.

And Hence Came EBR or the External Benchmark-Linked Rate

SBI has now introduced a new benchmark called External Benchmark-Linked Rate or EBR. Like RLLR, EBR is also linked to RBI Repo rate. However, the benchmark spread has been increased from 2.25% to 2.65% p.a.

EBR = RBI Repo rate + 2.65%.

RLLR was RBI Repo Rate + 2.25%

RBI Repo rate (as on October 15, 2019) is 5.15%.

Therefore, EBR comes out to 7.80% while RLLR stands at 7.40%.

You can check the latest home loan rate on SBI website.

As you can see, the best rate you can get (for home loan up to Rs 30 lacs) is EBR +15 bps. This translates to 7.95% p.a. Before RLLR was withdrawn, the rate for the best borrower was RLLR + 40 bps. This comes to 7.80% p.a. Clearly, the customers have lost out a bit.

Moreover, you can see the credit spread (not the benchmark spread) increases with the quantum of loan. Your nature of work (salaried or non-salaried), credit profile and the LTV ratio also affects the loan interest rate. Everything else being same, the Maxgain borrowers pay a higher rate of interest. There is a minor concession of 5 bps for the female borrowers.

Should You Shift from MCLR to EBR?

Since the bank can’t tinker much the spread at the time of shifting and the bank can’t charge more than the “Reasonable administrative/legal costs” for such shifts, the decision is likely to be relatively simple. You simply need to compare the final loan interest rate between MCLR and EBR. If you are getting a lower rate under EBR, shift to EBR or else maintain status quo. BTW, the bank may have a different interpretation for “Reasonable administrative/legal costs”. If the costs are not really reasonable, then you will have to do a deeper analysis. In any case, EBR is likely to be more transparent. Moreover, the past experience suggests that the borrowers on the older benchmark don’t really get a fair treatment.  There are many accounts where Base rate or BPLR borrowers are paying far higher interest than if they had shifted to MCLR. Weigh in this aspect too.

What Happens to Existing RLLR Borrowers?

I am not sure if they can hold on to RLLR loans or they will have to compulsorily shift to the new External Benchmark-Linked rate (EBR). I think they can choose to stay back. They will of course have an option to shift to EBR (Externally Benchmark-Linked Rate). Between EBR and RLLR,  RLLR is likely to be a cheaper choice too unless SBI tinkers with the credit spread for RLLR borrowers after a few years. When SBI does that, the borrowers can compare RLLR loan rate with EBR loan rate and decide.

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