The Reserve Bank of India (RBI) has asked all the Commercial Banks (excluding Regional Rural Banks), Local Area Banks, and Small Finance Banks to link interest rates of all different loans such as retail loans, home loans, offered by them, to an external benchmark effective October 1, 2019. In line with RBI’ decision, mostly all the commercial banks have opted for the RBI’s repo rate as the external benchmark to which all floating rate loans are linked. The interest rate which is linked to the repo rate is referred to as repo rate linked lending rate or RLLR. At present the repo rate is at 5.15 percent.
The spread charged by a particular bank still be same for all borrowers, but the risk premium varies from individual to individual. Normally the banks charge more risk premium from self-employed borrowers when compared to salaried individuals.
Top 10 banks charging lowest interest rate for salaried individuals
| Bank | RLLR | Minimum interest rate % | Maximum interest rate % |
| Punjab National Bank | 7.80 | 7.95 | 8.45 |
| Bank of India | 8.00 | 8.10 | 8.40 |
| Bank of Baroda | 8.10 | 8.10 | 9.10 |
| Andhra Bank | 8.10 | 8.15 | 9.30 |
| United Bank of India-RLLR | Not mentioned | 8.15 | 8.30 |
| Union Bank of India | 8.00 | 8.20 | 9.35 |
| SBI Term Loan | Not mentioned | 8.20 | 8.55 |
| IDBI Bank | 8.25 | 8.25 | 8.60 |
| Central Bank of India | Not mentioned | 8.25 | 8.55 |
| Syndicate Bank | Not mentioned | 8.25 | 8.45 |
Top 10 banks charging lowest interest rate for self-employed
| Bank | RLLR | Minimum interest rate | Maximum interest rate |
| Canara Bank | 8.30 | 8.35 | 10.30 |
| Bank of India | 8.00 | 8.10 | 9.00 |
| Indian Bank | 8.20 | 8.50 | 9.80 |
| SBI Max Gain | 8.05 | 8.60 | 8.95 |
| United Bank of India-RLLR | Not mentioned | 8.15 | 8.30 |
| Federal Bank | Not mentioned | 8.60 | 8.70 |
| SBI Term Loan | Not mentioned | 8.35 | 8.70 |
| IDBI Bank | 8.20 | 8.35 | 8.50 |
| Axis Bank | Not mentioned | 8.65 | 9.40 |
| ICICI Bank | Not mentioned | 8.75 | 9.10 |
Why RBI’ decision is important
In order to ensure better transparency, the central bank took the decision to link the interest rate of home loans and other retail loans to an external benchmark. Also this way, the transmission of the policy rate changes will be done in a faster way. Earlier under the MCLR (marginal cost based lending rate) regime, whenever RBI reduces the repo rate, banks did not give its benefits to the customers but whenever there was a surge in the repo rate by RBI, banks swiftly raised interest rates. As retail borrowers have limited bargaining power, they always got a bad deal.
It has now become mandatory for the banks to link loans to an external benchmark. Banks can choose from any of the following categories as their external benchmark:
- RBI’s repo rate
- Government of India 3-month Treasury bill yield published by Financial Benchmarks India (FBIL)
- Government of India 6-month Treasury bill yield which is published by FBIL
- Other benchmark market interest rate which is published by FBIL
When can borrowers’ EMI change?
As per RBI’s new guidelines, the banks can reconsider the home loan interest rates linked to the external benchmark at least once in three months. This means that any changes in the external benchmark rate would have to be passed to the customers within three months of the change in the external benchmark.
The banks now have to reprice the interest rates on loans after every three months to pass on any changes in the external benchmark rate. The move is in line with RBI’ plans to ensure that policy transmission happens for majority of customers and there is more transparency in the entire process.