Here’s How SBI’s Move to Link Saving Account and Loan Interest Rates to RBI Repo Rate Will Impact Your EMIs

Recently, SBI announced that it would be linking its savings deposits rates and short-term loans to the external benchmark rate of RBI. For instance, the effective interest on Savings Deposit above Rs 1 lakh will now come down to 3.25 percent from 3.5 percent. This has caused a widespread flurry of discussions all around the industry. This change is also going to affect the way borrowers will be paying their EMIs on different types of loans – including their Home Loans.

The press release from SBI stated that the new rates will be linked to benchmark rates and will come to effect from May 1, 2019. Previously, the cost of the banks’ deposits and the loans were linked through its internal benchmark rate, i.e., Marginal Cost of Funds based Lending Rate (MCLR) – revised by the bank every month. With SBI’s new move, the cost of funds and policy rates will be in tandem, and this will ensure that there is: 

Better transmission of the funds

Banks will be able to handle the Asset Management Liability (ALM) in much better terms.

How is this move going to affect your EMIs?

Herein, we will primarily focus on your SBI Home Loan and how the new change will affect the way you pay your EMIs.

When you take a Home Loan, you know that this loan’s EMI is a function of the bank’s cost of the funds, which are reflected in the MCLR (Marginal Cost of Funds based on Lending Rate) of each bank. Therefore, when you want to lower the lending rate, the first step a bank has to take is to ensure that it is able to bring its MCLR down. When the bank takes concrete steps to bring down the MCLR, it means that it will have to pay less interest to its depositors.

Therefore, now that the interest rates of SBI are connected to the RBI repo rate, whenever theRBI cuts down the repo rate, the banks will take some amount of time to pass on this benefit to the borrowers. Earlier, when they weren’t connected, there was always a time lag in lowering the lending rates. But with the new move, faster transmission of rate cuts are expected.

Here are two scenarios:

1. In a falling interest rate scenario – The borrowers will be benefited, as EMIswill be lowered. For instance, before SBI had made this announcement, the bank continued giving a higher fixed rate on the Saving Account Deposit irrespective of the fall in the repo rate as there had been a time lag in transmitting the benefit.

2. In case the rates rise, the EMIs will also increase.

For Existing Borrowers:

If you are an existing SBI customer and you have a Home Loan linked to MCLR, your EMI burden will lessen. But this will only be after the bank reduces its MCLR. In addition, you will only be able to benefit from this slashed interest rate when your Home Loan’s reset date arrives.

In most cases, most of the Home Loans offered by the bank come with a reset period of six months or one year. When this reset date is near, you will have your interest loans refreshed as per the market conditions at that moment.

For New Borrowers:

If you are a new Home Loan borrower and you are waiting for the new external benchmark based regime, you will have to wait for a slightly longer time as the guidelines are yet to be put in place.

Will this move affect depositors?

With SBI’s prudent move, depositors will be affected as approximately 40% of SBI’s deposits are in the Savings Bank Account and out of all these deposits, 80% by value is with account holders who have a balance of over Rs 1 lakh. When there is a linking of short-term loans with a limit of above Rs 1 lakh, the interest rate will now be close to 8.25 percent.

Different Rates for Borrowers

Since the new move has just come into place, there is a lot that needs to be assessed right now. There is still very less clarity on how this is going to affect the salaried and non-salaried borrowers.

Let’s consider a borrower in the first category who is keen to take a loan of up to Rs 75 Lakh. He or she will be charged an interest rate at 8.4%, assuming that the loan-to-value ratio is less than 80%. In case that LTV is more than 80%, then a premium of 20 bps will be levied on the borrower. Those borrowers who are in the higher risk groups, on the other hand, will have to pay 8.55%for the same offer. The maximum tenure now will 33 years, apart from the two-year moratorium permitted for under-construction properties. Another important thing to consider is that only those people whose earning is more than Rs 6 Lakh per annum will be eligible.

Note: Existing borrowers can switch by paying a conversion fee of 0.25%.

Summary and Fine Print

While the ultimate aim of SBI has been to bring in more clarity and transparency in the rate transmissions, the same scheme will be detrimental for borrowers during a rising interest scenario. The interest rates will go up as soon as RBI increases the policy rates. Many experts believe that the volatility will be very high, and borrowers should only go for this if they are comfortable with the idea of higher and more frequent changes to their Home Loans.

Further details of the scheme haven’t been detailed yet, but SBI has clearly spelled out that 3% of the outstanding principal amount is to be repaid every year in EMIs and interest to be serviced monthly as and when applied to the account.

Also Read: Types of Home Loans Offered by SBI

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