Average Indian families who cannot afford to buy homes on cash greatly rely on home loans. By choosing affordable EMIs, they make their dream of owning a home come true.
Considering this home purchase scenario & the need for essential facilities, RBI revised home loan processing for transparency by linking with external benchmark rates.Additionally, RBI has also examined the possibilities of mandating NBFCs (non-banking finance companies).
What are the mandatory notifications from RBI?
RBI made it mandatory for banks to link all new floating rate loans to MSME and loans to buy homes, vehicles, and personal consumption to an external interest rate benchmark from October 1, 2019.
“The interest rates for banks can be linked to RBI’s repo rate, the three-month or six-month Treasury yield published by Financial Benchmarks India Pvt Ltd (FIBIL) or any benchmark published by FIBIL” – RBI
For your information, the repo rate is the rate at which the central bank of India lends money to commercial banks in the event of any shortfall of funds.
Besides abiding by the guidelines, banks are free to offer such external benchmark-linked loans to other types of borrowers as well.
Many banks have not passed on Benefits to Customers
Though it was confirmed by RBI to link loan pricing with the external benchmark from October 2019, many banks have not planned for the benefits of customers. It is meaningless to continue with the old terms after new guidelines issued by RBI, say experts.
How customers can shift to New Scheme?
The new strategy is customer-centric. As the loan agreement applies throughout the term of the loan, customers have to approach banks to implement RLLR for them.
Overview of Internal & External Benchmarking Systems
Homebuyers who have taken a loan between September 2016 to September 2019 possibly have MCLR linked. Loans older than this have base rates applicable. Both cases are internal matters of the bank.
Major home loan borrowers complain that banks increase interest rates when increased by RBI but the vice versa scenario does not exist. In case if they cut down rates, the drop is too low. RBI studied this and found that customers find internal benchmark more convenient and thus it decided to launch an external benchmark system that is implemented from October 1, 2019.
After the official announcement by RBI, RLLR is highly influenced & agreed that MCLR should not suffer. The new system is more transparent than the old one, as experienced by customers. Customers adopting an external benchmark can ditch the internal benchmark easily.
Make way to Savings
Currently, many customers are taking the benefit of RLLR. As repo link home loans are lowinterest ones than MCLR, more savings are possible. For instance, with a 7.5% interest rate, 2.5 lakh savings can be made on the principal amount of 30 lakhs. This simply reduces 10 EMIs that means a lot for an average Indian home buyer.
RBI instructed banks to take one-time administration charges from the customers to implement a new scheme.
The External Benchmarking Scheme only applies to loan borrowers from the bank & not on housing finance companies.
How to shift to RLLR amid lockdown?
You may consult your bank via email or phone call. Ask your bank if this process can be accomplished online or not. If your bank’s branch has the right to handle this, the possibility exists that you can successfully enroll. If you wish to transfer bank balance to another account, some difficulties might be faced.